DEFINITION of 'Advance Dividend'

An estimate of the present value of an asset being liquidated that is used to provide an immediate dividend to uninsured depositors. An advance dividend is designed to help uninsured deposits in addition to the amount insured by government regulators.

BREAKING DOWN 'Advance Dividend'

When a financial institution fails, the Federal Deposit Insurance Corporation (FDIC) steps in and takes over bank operations. It appoints staff to examine the bank’s assets and to determine how much those assets should be worth. The FDIC also uses asset managers to help liquidate those assets by selling them to other financial institutions. The goal of the FDIC is to get through the process as quickly as possible in order to maintain consumer confidence in the financial system, and to ensure that the negative impacts of a failed bank on the economy are as limited as possible.

The FDIC was faced with a large number of bank failures during the 1980s. Savings and loans and thrifts were struggling to stay open, and depositors and creditors were likely to suffer if the financial institution’s assets were liquidated. This was a significant problem, especially since many of the depositors were unsophisticated in financial matters. Rather than risk depositors not being paid back for years as the liquidation process progressed, regulators sought to provide money to the depositors as quickly as possible. The plan would help the local economy by providing depositors with funds to spend.

The process of determining the advance dividend started as soon as the bank was closed. The FDIC would start selling off the bank’s assets to other financial institutions. Nonperforming assets would then be reviewed by FDIC staff, who estimated how much money the FDIC would eventually be able to collect (knowing that the value of all assets would not be fully recovered). If staff underestimated and the FDIC was able to collect more than anticipated then the FDIC would pay depositors a dividend as soon as this was realized. If staff overestimated how much would be collected the FDIC would absorb the loss.

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