CHAP TER 7
Loss sharing is a feature that the Federal Deposit Insurance Corporation (FDIC) first
introduced into selected purchase and assumption (P&A) transactions in 1991. The
original goals of loss sharing were to (1) sell as many assets as possible to the acquiring
bank and (2) have the nonperforming assets managed and collected by the acquiring
bank in a manner that aligned the interests and incentives of the acquiring bank and the
FDIC. Under loss sharing, the FDIC agrees to absorb a significant portion of the loss—
typically 80 percent—on a specified pool of assets while offering even greater loss pro-
tection in the event of financial catastrophe, and the acquiring bank is liable for the
remaining portion of the loss.
Loss sharing can provide benefits to all parties involved when compared to the con-
ventional P&A structure, particularly where nonperforming assets are involved. For
example, by keeping loss share assets in the banking (as opposed to the liquidation) envi-
ronment, the FDIC may benefit by better preserving the value of the assets. Failed bank
asset portfolios with loss sharing are more attractive to acquirers because the FDIC is
absorbing a significant portion of the loss. Another benefit of loss sharing is that the
asset management and disposition incentives of the acquirer and the FDIC become
more rationally aligned as both parties are sharing in the loss. This common interest
reduces the need for direct FDIC asset disposition oversight and helps provide a more
streamlined disposition process for the loss share assets.
The FDIC has entered into 16 loss sharing agreements that were created to resolve
24 banks that failed between 1991 and 1993. Many of the failed banks were fairly large.
While fewer than 10 percent of banks that failed during that period were resolved using
loss sharing, those transactions accounted for 40 percent of the total failed bank assets.
Loss sharing has evolved into a vehicle that allows the FDIC to better manage some
of the unique prob