Net-Worth Certificate

What Was a Net-Worth Certificate?

A net-worth certificate was an instrument used by the Federal Deposit Insurance Corporation (FDIC), starting with the passage of the Garn-St. Germain Act in 1982 as part of an effort to save failing banks and thrifts by providing emergency capital.

During the 1980's savings & loan crisis, the net-worth certificate was used as a type of forbearance in which failing banks and thrifts were allowed to apply for financial assistance in the form of the net-worth certificate. The amount of the certificate was based on the bank’s net worth, and it was issued for a temporary period.

Key Takeaways

  • A net-worth certificate was an emergency temporary postponement of debts owed, backstopped by the FDIC, in order to prevent banks from failing.
  • They were put to use extensively during the savings & loan crisis of the 1980s, but have since fallen out of favor and were not really used during the 2008 financial crisis.
  • Net-worth certificates could effectively capitalize a bank's net worth, providing much-needed support in times of crisis.

How Net-Worth Certificates Worked

When deposit-rate restrictions that had existed for decades were lifted, banks and thrifts found themselves having to pay out more in interest on deposits than they were earning from their long-term investments, such as 30-year fixed-rate mortgages and government bonds. This resulted in the savings and loan crisis, which saw 1,043 savings and loan associations fail in the United States between 1986 and 1995.

The Net-Worth Certificate Program provided the FDIC with a means to give embattled banks and thrifts time to resolve their problems.

During this period, it was hoped that the failing bank or thrift would restructure its investments and make necessary adjustments to new market conditions, in order to grow back into a state of solvency. The Net-Worth Certificate Program was intended to give failing banks and thrifts a means of government support that would minimize the government’s financial responsibility for that support.

Net-Worth Certificates and the 2008 Financial Crisis

The net-worth certificate is little used today. However, during the 2008 financial crisis, some experts, including former FDIC Chair William Isaac, suggested reintroducing net-worth certificates to rescue struggling banks while using minimal government intervention. This, however, never came to pass.

In his 2010 book, Senseless Panic: How Washington Failed America, Isaac argued that the revival of the Net-Worth Certificate Program could have obviated the need for a $700 billion government bailout of struggling banks. He cites the program’s success during the 1980s, when the program was used to save 22 of the 29 banks in which it was implemented, at a cost of $480 million to the FDIC, or about 0.8% of the failed banks’ assets. The FDIC lost an average of 15% of the assets of the banks that were not saved using the Net-worth Certificate Program, and an average of 20% of the assets of banks that failed during the 2008 financial crisis.

While net-worth certificates have not been used to support failing banks or thrifts since the savings and loan crisis, the regulatory framework that allows for their use remains in place.

Article Sources

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  1. FDIC. "The Savings and Loan Crisis The Savings and Loan Crisis and Its Relationship and Its Relationship to Banking," Pages 176-187. Accessed July 8, 2021.

  2. Timothy Curry and Lynn Shibut. "The Cost of the Savings and Loan Crisis." FDIC Banking Review, Volume 13, Issue 2, 2000, Pages 26-35.

  3. William M. Isaac. "Senseless panic: how Washington failed America." John Wiley & Sons, 2010.