DEFINITION of 'Assuming Institution'

A healthy financial institution that purchases the assets of a failed financial institution. The assuming institution assumes the liabilities of the failed institution, with some assets carrying governmental guarantees.

BREAKING DOWN 'Assuming Institution'

The Federal Deposit Insurance Corporation (FDIC) has the authority to close banks, thrifts, and other financial institutions that fail. Part of the closing process involves the FDIC gathering all records and assets, as well as notifying the general public as to what the situation with the failed bank is. It also notifies other financial institutions. The FDIC then creates an inventory of the bank’s assets and liabilities, and provides one copy of that to the assuming institution. The regulator tries to move this process along as quickly as possible in order to limit the harm caused to depositors, other financial institutions, and the economy in general.

Assuming institutions work with the FDIC during the settlement process, and set a settlement date that signifies when the books of the failed financial institution are closed. The settlement date can range from six months to a year after the institution closes, with larger institutions typically taking more time. It is during this settlement period that any assets not purchased by the assuming institution can be sent back to the receiver.

Typically, companies looking to purchase a financial asset will conduct extensive due diligence in order to have the best idea of the risks associated with a transaction. In the case of a failed institution, especially if the institution has a large amount of assets and liabilities, regulatory organizations may not have the luxury of a long time frame in which to work. Assuming institutions in these scenarios may have difficulty indicating which assets it does and does not want. In general, regulators prefer a situation in which the financial functions of the failed bank are taken over by the assuming institution, rather than the regulator having to pay off depositors.

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