With First Republic Stock in a freefall, ticker (FRC) down over 98% and a FDIC receivership most likely in the works, what does this mean for the bank, the depositors, the shareholders and more.
What is FDIC receivership?
FDIC receivership refers to the process by which the Federal Deposit Insurance Corporation (FDIC) takes control of a failed bank or financial institution. When a bank fails, the FDIC may step in as receiver to protect depositors and ensure the orderly liquidation of the failed institution.
There are two types of FDIC receiverships:
- Immediate takeover: In an immediate takeover, the FDIC takes over a failed bank immediately. This is typically done when the bank is in such bad financial condition that it is at risk of failing within a few days.
- Purchase and assumption (P&A): In a P&A, the FDIC sells the assets of a failed bank to another, healthy bank. This is typically done when the failed bank is still solvent, but it is not viable on its own.
What happens to the money depositors have in FRC?
The FDIC’s role as a receiver involves managing the failed bank’s assets, such as loans and investments, and using them to pay off the bank’s debts and obligations. The FDIC also takes over the bank’s deposit accounts and works to return funds to depositors up to the insured limit of $250,000 per depositor, per account.
The FDIC may either liquidate the bank’s assets and distribute the proceeds to creditors and depositors, or it may sell the bank’s assets to another financial institution. In some cases, the FDIC may also provide assistance to the acquiring institution to ensure a smooth transition of the failed bank’s operations.
In what order is the money paid back from depositors, to shareholders and creditors.
The order of priority for payment in a bank receivership is as follows:
- Insured Depositors: The FDIC provides insurance coverage up to $250,000 per depositor, per account type. Insured depositors are the first in line to receive payment from the FDIC.
- Uninsured Depositors: Depositors with balances over the insured limit may be partially compensated by the FDIC. However, uninsured depositors are lower in priority than insured depositors and may receive only a fraction of their deposits.
- General Creditors: The failed bank’s general creditors, such as vendors or suppliers, are next in line to be paid from the remaining assets of the bank.
- Subordinated Debt Holders: Debt holders who have subordinated debt, which is a lower priority type of debt, are next in line to receive payment from the remaining assets of the bank.
- Shareholders: Shareholders are the last in line to receive payment, if any funds are left after all of the above parties have been compensated.
The actual order of payment may vary depending on the specifics of the bank’s situation and the amount of assets available to the FDIC for distribution. However, the above priority order generally applies in most bank receivership cases. The FDIC may not be able to pay back all creditors in full. In some cases, creditors may receive only a fraction of their claim.
Why does the FDIC put a bank into receivership?
Overall, the goal of FDIC receivership is to protect depositors and maintain stability in the financial system by minimizing the impact of a failed bank on the broader economy.