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What Is an Advance Dividend?
An advance dividend is a payment to uninsured depositors in the event of a bank or thrift failure. When a financial institution becomes insolvent, the Federal Deposit Insurance Corporation (FDIC) steps in as the insurer of the bank's deposits and the receiver of its assets.
The FDIC then pays out in full for insured deposits and pays an advance dividend on uninsured deposits. The advance dividend is calculated based on the estimated value of the remaining assets. This is designed to ensure that uninsured depositors receive immediate payment on at least a portion of their deposits.
An advance dividend may also be another name for an interim dividend, which is issued to a corporation's shareholders in advance of their annual financial statements. When it is used in reference to the FDIC, however, an advance dividend refers to a payment to uninsured depositors.
Key Takeaways
- An advance dividend is a payment to uninsured depositors in the event of a bank or thrift failure.
- When a financial institution fails, the Federal Deposit Insurance Corporation (FDIC) takes over and makes a conservative estimate of the value of the institution's assets. This estimate is used as the basis of the advance dividend.
- If there are enough assets to cover all depositor claims, there may also be an advance dividend for unsecured creditors.
- An advance dividend can also refer to an interim dividend.
Understanding Advance Dividends
Advance dividends are part of the work of the Federal Deposit Insurance Corporation (FDIC). When a financial institution closes, the FDIC steps in and takes over its operations and assets. In most cases, these obligations are transferred to a healthy bank in a purchase and assumption transaction. Otherwise, the FDIC repays these obligations with the liquidated assets of the defaulting bank.
Since individual accounts are fully insured up to $250,000, these deposits can be paid out in full, usually within a few days. Uninsured depositors and creditors are paid out from the institution's remaining assets.
The agency 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 maintain consumer confidence and limit the negative impacts of the failed bank.
The financial system was faced with a large number of bank failures during the 1980s. Savings and loans struggled to stay open, and depositors and creditors suffered from illiquidity while waiting for their claims to be resolved.
This was a significant problem, especially since many of the depositors were unsophisticated in financial matters. Rather than let depositors wait for years as the liquidation process progressed, regulators sought to provide a portion of those deposits as quickly as possible in the form of advance dividends. This helped the local economy by reducing the depositors' liquidity risk.
How Advance Dividends Are Calculated
The amount of an advance dividend represents the FDIC’s conservative estimate of the ultimate value of the assets in federal receivership. Advance dividends are paid to uninsured depositors, thereby giving them an immediate return of at least a portion of their deposits. If there are remaining assets, they can also provide a dividend to the bank's unsecured creditors.
The process of determining the advance dividend starts as soon as a bank closes. The FDIC first starts selling off the bank’s assets to other financial institutions. Nonperforming assets are then reviewed by FDIC staff, who estimate how much money the FDIC would eventually be able to collect. This estimate is used to determine the size of the advance dividends.
If the staff underestimates the value of these assets, then the FDIC can pay claimants a further dividend up to the par value of their uninsured deposits. If the staff overestimates the value of the assets, the FDIC absorbs the loss.
In certain circumstances, an advance dividend may be used interchangeably with an interim dividend. This is a payment made to a corporation's shareholders before the company's annual general meeting and final financial statements. Interim dividends are issued more frequently in the United Kingdom, where it is common for dividends to be paid on a semiannual basis.
What Is the FDIC?
The Federal Deposit Insurance Corporation, or FDIC, is a federal agency that insures deposits in U.S. banks and thrifts. This insurance protects people who have deposited their money in the bank in the event of a bank failure. The FDIC was created in 1933. Its goal is to ensure the stability of the U.S. financial system and maintain public confidence in banks.
Where Does the FDIC Get Its Money?
The FDIC's Deposit Insurance Fund has two sources of funding: premiums paid by FDIC-insured banks and interest earned on funds that are invested in government securities.
How Much Money Does the FDIC Give You?
The FDIC insures deposits up to $250,000 per depositor as long as your money is at an FDIC-insured bank. Before joining a bank, you should confirm that it is a member of the FDIC insurance program.
How Often Do Bank Failures Happen?
Bank failures are not uncommon, though it is rare for large banks to fail or for many banks to fail at once. Between 2001 and 2023, there were 563 bank failures. In five of those years, there were no bank failures; in 2010, there were 157.
What Banks Failed in 2023?
In March of 2023, both Silicon Valley Bank (SVB) of Santa Clara, California, and Signature Bank of New York, New York, failed. To protect depositors at both institutions, the FDIC transferred the banks' deposits and assets to full-service "bridge banks" that will be operated by the FDIC. The FDIC will market SVB and Signature Bank to potential bidders.
Are There 2023 Advance Dividends for Silicon Valley Bank and Signature Bank?
The FDIC lists advance dividends from past bank failures on its website. As of March 2023, there was no 2023 advance dividend yet listed for either Silicon Valley Bank or Signature Bank.
The Bottom Line
An advance dividend is a payment to uninsured depositors in the event of a bank or thrift failure. When a financial institution fails, the Federal Deposit Insurance Corporation (FDIC) takes over. Insured deposits are covered by the FDIC up to $250,000.
For uninsured deposits, the FDIC pays depositors an advance dividend to minimize the negative impact of a bank failure. The advance dividend is calculated based on a conservative estimate of the value of the bank's assets. If the estimate can cover the claims of insured and uninsured deposits, then the FDIC may also pay an advance dividend to unsecured creditors.
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