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What Are The Conditions For Buying A Failed Bank?

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There is a very wrong misconception out there that only filthy rich investors can do vulture investing because they always have ready cash. Buying a stressed banking institution is one form of vulture investing. Even small investors can do it as long as they comply with particular guidelines as provided by Federal Deposit Insurance Corporation. Important to note is that a bank can never go bankrupt. So, when it reaches an insolvent state, the state chartering authority forces the bank into receivership. FDIC becomes the receiver, seizing the control of the bank assets e.g. the outstanding loans and liabilities e.g. leases, deposits, and undisbursed loans. Not so many people understand the conditions for buying a failed bank. This post explains what it takes.

Acquiring Assets From A Distressed Bank

When a bank fails, the FDIC takes the responsibility of selling its assets at the most reasonable price. This is done to pay off the existing liabilities. The remaining liabilities will be covered by the FDIC. This is why every bank must be insured by this agency. Many times, the highest bidder never takes the loans in default. Therefore, it is the duty of the FDIC to get buyers who can buy the hard to sell liabilities. The agency uses creative ways like online auctions to get the highest possible bids. This involves a series of announcements regarding the sale of assets. Then the loans are listed on the FDIC website as well as the office furniture, and real estate.

How to Buy a Bank Before it Seizes

Private investors have a better chance of buying a financial institution before the FDIC seizes it. Do you think that the assets of a particular bank for sale is undervalued? Or that the distress is exaggerated? Then it would be profitable to invest equity into the bank to navigate through the plunge. If you are an expert in banking, this can be your deep value investment.

What are The Requirements?

You will need to fulfill these conditions under the Covered Investors policy of the FDIC before bidding on a distressed bank:

  • You have to retain 10% or more of the capital reserve from the troubled assets. This is unlike the normal bank acquisition that requires investors to maintain 5% of the capital reserve. Then the bank must maintain well capitalized levels after the acquisition
  • A minimum holding period of 3 years
  • No Insider Lending
  • Disclosure of the ownership chain
  • Limitations on the structure of investment

These rules and regulations exist to clarify the ownership of the bank. This is especially important in hedge funds and equity firms whose legal structures are a bit complex. As a private investor, the FDIC will advise you to limit your involvement in distressed banks to passive investment. This will actually keep you from

 

turning into a bank holding company that has to face stringent requirements. So, limit your equity to 25% of voting shares or less and 33% of the total equity.

We have summed up the conditions for buying a failed bank. Now that you understand how to purchase an American bank that failed, don’t go looking for a watch list of stressed institutions on the FDIC. Ask the experts if you need more insights to buy a bank who has already distressed securities. Visit mergerscorp.com now. At MergersCorp™ M&A International, we are ready to take you through the whole process of buying a bank. You can also talk to us if you are looking to sell failed assets privately. We make sure that the involved parties meet their mutual interests.

Robert G. Cotitta
Robert G. Cotitta
Robert G. Cotitta
Robert G. Cotitta, President of Bancorp I, Inc. has over 40 years of experience in the banking industry in ownership, management, and consulting positions.

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