What Is Purchase and Assumption?
Purchase and assumption is a transaction in which a healthy bank or thrift purchases assets and assumes liabilities (including all insured deposits) from an unhealthy bank or thrift. It is the most common and preferred method used by the Federal Deposit Insurance Corporation (FDIC) to deal with failing banks. Insured depositors of the insolvent institution immediately become depositors of the assuming bank and have access to their insured funds.
- Purchase and assumption is a transaction in which a healthy bank or thrift purchases assets and assumes liabilities from an unhealthy bank or thrift.
- The FDIC arranges the purchase and assumption for FDIC-insured institutions.
- Depositors of the old institution immediately become account-holders of the new one; while their funds are intact, interest rates and other terms may change.
- Purchase and assumption is the FDIC's preferred method of dealing with failing banks; deposit payoffs or liquidation and open bank assistance are two others.
Understanding Purchase and Assumption (P&A)
In a purchase and assumption transaction, the FDIC arranges the sale of a troubled or insolvent financial institution to a healthy one. Along with becoming the depository for personal checking, savings, and other insured accounts, the acquiring bank may buy other assets (such as loans or mortgages) of the failing bank as well.
The FDIC and the assuming bank often try to make the transition as smooth as possible for consumers. Direct deposits are automatically re-routed to the new institution, for example.
However, there is one important difference: The accrual of interest ceases on all accounts once the troubled bank is closed. The assuming bank becomes responsible for re-establishing interest rates and other terms on accounts and loans, and it may change them—it is under no obligation to continue the conditions of its predecessor. Of course, depositors have the right to withdraw their funds from the new institution, with no penalty.
Alternatives to Purchase and Assumption (P&A)
Purchase and assumption (P&A) is the most common of three basic resolution methods the FDIC uses. The other two are as follows:
- Deposit payoffs and liquidation: The FDIC pays depositor claims directly by check, up to the insured balance in each account. It then disposes of the failed bank’s assets to partially recover its liquidation costs.
- Open bank assistance: An insured institution in danger of bankruptcy receives recapitalization assistance before receivership in the form of an injection of cash or noncash capital injection to prevent its failure.
During the global financial crisis of 2008-09, the U.S. government launched the Troubled Asset Relief Program (TARP) to provide financial assistance to banks that were deemed "too big to fail."
Types of Purchase and Assumption (P&A) Transactions
Purchase and assumption is a broad category that includes a variety of more specialized transactions, such as loss sharing and bridge banks, a stop-gap measure, in which one institution temporarily continues the operations of the insolvent bank, providing it some breathing room to find a buyer so that it may once again become a going concern.
Bridge-bank transactions are considered better than deposit payoffs (see below), but they involve more time, effort, and responsibility from the SEC. In the late 1980s and early 1990s, the FDIC used bridge-bank transactions with financial institutions such as Capital Bank & Trust Co., First Republic Bank, and First American Bank & Trust.
In a type of purchase and assumption called a whole-bank transaction, all of the failing bank's assets and liabilities are transferred to the acquiring bank. An FDIC asset evaluation determines the worth of the assets being purchased.
However, certain categories of assets, such as subprime loans, are never or infrequently transferred in purchase and assumption transactions.