What is a Purchase and Assumption?
A purchase and assumption is a transaction in which a healthy bank or thrift purchases assets and assumes liabilities from an unhealthy bank or thrift. Purchase and assumption (P&A) is the most common of three basic resolution methods used by the Federal Deposit Insurance Corporation (FDIC) to deal with failing banks. The other types of assistance given to failing banks are deposit payoffs and liquidation and open bank assistance transactions. There was also a Troubled Asset Relief Program (TARP) payment program launched in response to failing banks that were deemed "too big to fail" during the global financial crisis.
Understanding Purchase and Assumptions (P&A)
Purchase and assumption is a broad category that includes more specialized types of purchase and assumption transactions, such as loss sharing and bridge banks. Bridge-bank transactions are considered better than deposit payoffs, 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 banks 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. However, certain categories of assets are never or infrequently transferred in purchase and assumption transactions. The value of assets being purchased is determined by an FDIC asset evaluation.