What Is Asset Valuation Review (AVR)?
The term asset valuation review (AVR) refers to a process that establishes an estimate of the value of a failed bank’s assets. Banks may fail for a number of reasons. The most common occurrence is when the value of their assets drops below market value—well below their liabilities. The AVR process sets the minimum price that a regulatory body is willing to accept from other financial institutions that want to purchase the assets from a failed bank.
- Asset valuation review is a process that establishes an estimate of the value of a failed bank’s assets.
- The process sets the minimum price that a regulatory body is willing to accept from other financial institutions that want to purchase s failed bank's assets.
- The review uses a sampling method to estimate asset values—the sample is typically a stratified random sample.
- The AVR process is automated as much as possible to ensure that the valuation is completed quickly.
Understanding the Asset Valuation Review (AVR)
Banks are an important part of any economy. They provide banking services for the general public, issue loans, create liquidity in the market, along with other financial services such as currency exchange and providing safety deposit boxes. These institutions may be in trouble when there are problems in the economy—all of which can lead to failure.
When a bank fails, it can no longer meet its financial obligations to its creditors. These are the entities that it owes money to, as well as depositors. As noted above, banks fail for a number of reasons including insolvency or when they can't pay their creditors. One of the most common reasons why banks fail, though, is because the value of their assets falls so far below their market value that their liabilities.
When this happens, the appropriate regulatory body—federal or state—must make arrangements to sell off the bank's assets. This requires a review of these assets, which is called an asset valuation review. The AVR is the process by which a failed bank's assets are valued. In the United States, a failed financial institution is turned over to the Federal Deposit Insurance Corporation (FDIC) so that the bank can be liquidated or merged with a healthier institution. The resolution process involves gathering information on the failed bank’s assets and liabilities, notifying the public and other financial institutions that the bank has failed, and is trying to find other financial institutions to purchase the failed bank.
The FDIC covers $250,000 per depositor, per insured bank, for each category of account ownership.
Establishing the value of a failed financial institution’s assets can be a complicated endeavor, especially when the FDIC is unsure of the complexities involved with the bank. This is, at least, until the agency examines the bank's books. The regulator assesses the value of the bank’s portfolio of assets and assigns a price to each type of loan grouping. By categorizing assets into different pools, the regulator is able to cross-match the different pools to different banks depending on their levels of interest. Due to the fact that most banks have a large portfolio of assets, such as loans, the asset valuation review uses a sampling method to estimate the value of the assets. The sample is typically a stratified random sample, and the process is automated as much as possible to ensure that the valuation is completed quickly. The regulator may spend more time evaluating the value of a failed bank’s largest loans.
Many banks failed around the time of the Great Depression. This was one of the main reasons why the FDIC was created. In 1993, when the agency first opened, as many as 4,000 banks failed in the United States. By that point, depositors lost as much as $140 billion. The FDIC helped insure deposits that bank customers would not be able to recover without it. When a bank fails, the FDIC generally steps in to provide financial assistance, such as capital loss coverage, in order to attract other banks into undertaking the transaction. The goal is to end the liquidation process as quickly as possible with the least financial impact to the deposit insurance fund.