What happens if a bank is on the other side of your deal, and then the bank fails? Most people have not spent much time thinking about this - but now more and more of us who are involved in the CRE world must do so. 37 banks have failed to date in 2010, after 140 such failures in 2009. All of these banks have been closed by the FDIC. More bank failures are expected as commercial real estate loan defaults increase, and high unemployment keeps the economy limping along at best. What legal impacts will those failures have on you and your business? To assess that, you need to understand the FDIC and its role in "resolving" failed banks. This set of posts will first provide an overview of how the FDIC handles bank failures, then will discuss how a bank's failure and resolution by the FDIC might affect an entity that is doing business with a bank in various capacities (as borrower, landlord, etc.). (The topic's a bit dense, so I can't fit it into one post. I'll try to describe it as clearly as possible.)What is the FDIC and what does it do? The FDIC is a bank regulator. The Federal Deposit Insurance Corporation oversees U.S. insurance funds for depositary financial institutions. It has several functions. The FDIC is one of several regulators responsible for banks and thrifts. Others include the Office of the Comptroller of the Currency, which is responsible for supervising national banks, the Federal Reserve, which is responsible for supervising both state member banks and holding companies, the Office for Thrift Supervision, for S&Ls, and various state agencies. (For purposes of this set of posts, I'll simply refer to all such institutions as "banks.") The FDIC is an insurer. As the insurer of certain deposit bank accounts, the FDIC manages and controls risks to two separate deposit insurance funds, the Bank Insurance Fund and the Savings Association Insurance Fund, and protects the depositors in FDIC-insured institutions. When a federally insured depository institution fails, ultimately the FDIC pays out insured bank deposit accounts (if no other resolution is less costly). The FDIC is a receiver for failed banks. In addition, the FDIC acts as receiver, conservator or liquidating agent for failed federally insured depository institutions, as well as for most state-chartered financial institutions, in order to promote the efficient and expeditious liquidation of failed banks and thrifts. In this capacity, the FDIC has broad power and authority:

it can "resolve" the problems of the failing institution, through asset sales or a number of techniques discussed later; or
it can put such an institution into receivership, and close it; or
it can combine a partial resolution with a receivership.

Overview of bank failure far more discretion Few early stage warnings. See, e.g.

Note: Many thanks to my co-author and partner Ed Karlin of Seyfarth Shaw LLP and to my co-author James Bryce Clark, General Counsel of Oasis-Open.com, who both coauthored with me a shorter version of this material in an article entitled "Take it to the Bank" which appeared last October in Los Angeles Lawyer Magazine, and to LA Lawyer Magazine for its permission to reuse some of the same material.

Instant Insights /

The Devil's Triangle of Bank Failure (part 1)

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