Academic journal article International Journal of Management

Effects of the Purchase of Insured versus Uninsured Bank Deposits on Acquirer Returns: A Study of the Transactions of Failed United States Banks

Academic journal article International Journal of Management

Effects of the Purchase of Insured versus Uninsured Bank Deposits on Acquirer Returns: A Study of the Transactions of Failed United States Banks

Article excerpt

This paper examines FDIC (i.e. Federal Deposit Insurance Corporation) arranged transactions of banks that failed during the period 1994 to 2004. I find that there were two main types of transactions during that period: "Purchase and Assumption", where some or all of the deposits, certain other liabilities and a portion of the assets (sometimes all of the assets) were sold to an acquirer, and "Purchase and Assumption of the insured deposits only", where only the insured deposits were assumed by the acquiring institution. I find that there is a statistically significant difference between the deposit amounts and the sizes of the failed banks in each of these two groups as well as the losses to the FDIC due to the failures in each group. Acquirers avoided the "Purchase and Assumption" alternative in case of larger banks with bigger deposits and these cases ended up being extremely costly to the FDIC Then, I identify 17 acquirers of failed banks that were publicly traded during the period 1994 to 2004. Using event study methodology, I find that, on average, there was a positive abnormal return for acquirers of failed banks on the acquisition announcement day. While both types oftransactions resulted in a positive abnormal return for the acquirers, the abnormal return was higher for the "Purchase and Assumption" transactions. For the single case of "Insured Deposit Transfer" where the acquiring institution served as a paying agent for the insurer, established accounts on their books for depositors, and often acquired some assets as well, I find a negative abnormal return.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The financial crisis that started in 2007 has resulted in the collapse of large financial institutions, the acquisitions of some of these institutions by other large institutions, and the bailout of the remaining ones by national governments. The housing markets have also suffered during this period resulting in millions of foreclosures and severely reduced real estate values. Most economists consider this recent crisis as the worst financial crisis since the Great Depression of the 1930s.

There have been 354 failures of financial institutions in the U.S. since the start of 1994 (284 since the start of 2007). Out of these 354 failures, 13 were assistance transactions where the institution's charter survived and assistance was provided to the acquirers, and in the remaining 341 cases, the institution's charter was terminated and insured deposits plus some assets and other liabilities were transferred to a successor charter.

In this paper, I focus on these FDIC-assisted failed bank transactions and their impact on the share prices of the acquiring firms. More specifically, I attempt to answer these three questions: (1) Is there any difference between the characteristics of the failed banks in different types of FDIC-assisted transactions? (2) Do the shareholders of the acquiring firms benefit from the purchase? (3) What type of FDIC-assisted transactions benefit the shareholders of the acquiring firms more?

Since I started doing my analysis in 2006, 1 examine the period 1994 to 2004 (there was no failure in 2005). So, during my sample period, the period 1994 to 2004, there were 70 failures in total.

When an insured commercial bank fails, the FDIC has several options to choose from. These options are under three categories. Category 1 includes "Assistance Transactions" ("A/ A") and "Reprivatization" ("REP") where the institution's charter survives. In the "Assistance Transactions" ("A/ A"), the FDIC provides assistance to the acquirer who purchases the entire institution. In the "Reprivatization" ("REP") option, there is a management takeover with or without assistance, followed by a sale with or without additional assistance.

Category 2 includes transactions where the institution's charter is terminated. Category 2 includes "Purchase and Assumption" ("PA"), "Purchase and Assumption of the Insured Deposits Only" ("PI"), "Insured Deposit Transfer" ("IDT"), and "Management Takeover by the Federal Savings and Loan Insurance Corporation" ("MGR") transactions, as well as the "Purchase and Assumption" ("P&A") transactions where some or all of the deposits (i. …

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