money,bankingSupposes you have two deposit totaling $280,000 with a bank that has just been declared insolvent. Would you prefer that the FDIC resolve the insolvency under the “payoff”...

money,banking

Supposes you have two deposit totaling $280,000 with a bank that has just been declared insolvent. Would you prefer that the FDIC resolve the insolvency under the “payoff” method” or the “purchase and assumption” method? Explain your choice.

Expert Answers
Karen P.L. Hardison eNotes educator| Certified Educator

In the payoff method, your assets above the FDIC insured amount, $200,000 USD, will be lost. With a purchase and assumption transaction, the assets and liabilities (most of them) are transferred intact to a new bank owner. This is essentially what happened when Bear Sterns went down. After the Federal Reserve orchestrated (in the middle of the night) a loan to JP Morgan that went to Bear, Morgan four days later purchased and assumed the assets and liabilities of Bear Stearn. To save Bear, the Fed reactivated emergency protocol, which had last been used in the Great Depression, that allowed Federal Reserve lending to an investment bank selling stocks and bonds. Overall, a purchase and assume transaction is preferable.

http://www.fdic.gov/bank/historical/reshandbook/ch3pas.pdf

http://tinyurl.com/7csgdqc

http://tinyurl.com/7csgdqc

accessteacher eNotes educator| Certified Educator

You need to be very careful with this, as there are two options that offer potential risks and rewards. With the pay off method at least you are guaranteed getting some of your money back. However, in the case of the purchase and assumption method, you have the chance of gaining all of your money back if you are lucky enough for your old bank to be taken over by another bank. This means that the new bank will honour and give you the money you had in the old bank.

justaguide eNotes educator| Certified Educator

In the payoff option $80000 are lost and in the purchase and assumption option there is always a risk that there is no other bank willing to purchase the bank in distress. An ideal option would be to create several accounts each under $200000 with several banks. This would complicate things a bit but I guess the security it would provide compensates for the effort.

belarafon eNotes educator| Certified Educator

I'm not sure if a payoff will lose you everything over $200k period, or everything over $200k per deposit. Regardless, I am firmly on the side of the payoff, since there is no guarantee that the bank will be purchased and your money restored. It is better to take your losses and get out with some money rather than risk losing everything.

pohnpei397 eNotes educator| Certified Educator

I think that I'd prefer the purchase and assumption method.  My deposits are too big to be completely covered by the FDIC.  Therefore, I'd rather have some other bank come and buy my insolvent bank so that I could get all of my money back rather than losing some because I went over the limit.

vangoghfan eNotes educator| Certified Educator

I agree with the previous post.  As I recall, the FDIC will now insure deposits up to $200,000 (it used to be $100,000).  Thus, if I count on the FDIC, I have lost $80,000.  I would have been wiser to divide my money between two banks rather than relying on just one.

litteacher8 eNotes educator| Certified Educator

This is assuming that another bank is going to buy your bank.  Are you really willing to take that chance?  In some cases it is better to take the money and run, even if it is not all of it, than to risk losing everything if your bank goes kaput.

literaturenerd eNotes educator| Certified Educator

I also support posts two and three. I would like the ability to get back as much of my deposit as possible. Although it is not an option, I would suggest putting only the amount of deposit covered in any one bank.