Are failed banks worth acquiring? FDIC guarantees and acquirers' gains.

Monday, February 13, 2012 - 2:00pm
Event Type: 

1420 Molecular Biology Bldg.

Valentina Salotti, Assistant Professor, Department of Finance, ISU

Federal Deposit Insurance Corp. (FDIC) data shows that U.S. bank failures started to increase at the beginning of the economic crisis in 2008 (25) and boomed in 2009 (140) and 2010 (157). In the vast majority of cases the FDIC uses purchase and assumption agreements to resolve failures and enters a loss-sharing agreement on future losses with the acquiring bank. We find that acquiring banks capture substantial value from acquiring failed institutions. Acquirers experience an unexpected increase in their stock price following the acquisition announcement. The gains to acquirers are strongly related to the incentives that the FDIC provides, especially the loss-sharing provisions where the FDIC guarantees a large percentage of the value of acquired assets. The findings suggest that the success of the FDIC bank failure resolution process has come at the cost of large, though potentially necessary, value transfers to acquiring banks through the loss share provisions.