One of the FDIC’s pillars are loss-share agreements. Suppose Bank A fails. And, suppose Bank B wishes to acquire Bank A but is hesitant due to the uncertain exposure it could have. The FDIC assists by covering a portion of those losses. Bank B gains because it has reduced its risk. The FDIC gains because it can sell Bank A for a higher price than it otherwise could have. And, even the consumers gain because their banking relationships will remain intact (i.e. all of their accounts will be transferred to the same entity). When Bank B and the FDIC enter their loss-share agreement, Bank B will account for the FDIC’s assistance by recording an indemnification asset.

There are a number of ways this plays out in the real world, but, in general the asset will amortize over time and be reduced as actual reimbursements are received. A number of loss-share agreements are set to expire in 2013. Meaning, all the “Bank Bs” out there will take a loss on any indemnification assets that exist at the time of the expiration. This predicament is not lost on the Bank Bs whose agreements are expiring soon. Therefore, we should expect a flurry of activity from banks to address this issue in the upcoming months.

For more information on loss-share agreements, visit the FDIC’s webpage – http://www.fdic.gov/bank/individual/failed/lossshare/index.html.

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