The Determinants and Effects of the Discount in the FDIC-Assisted Failed Bank Acquisitions

During the recent financial crisis, the Federal Deposit Insurance Corporation (the FDIC) auctioned most of the failed banks. A distinguishing character of these failed bank auctions is that the failed banks are sold at discount from the most recent quarter valuation of their reported asset value. A second distinguishing feature of these auctions is that acquirers of these failed banks have frequently reported bargain purchase gain (BPG) compared to regular mergers during the same period. Based on a unique sample of the FDIC-assisted whole-bank transactions in the recent financial crisis, we measure discount using accounting information, investigate what factors lead to larger discount and larger reporting of BPGs, and further examine the effects of discount on the post-merger performance of the acquiring institutions. Consistent with prior literature, we identify bidding competitiveness and loss sharing agreement as significant determinants. However, DIF reserve ratio, the proxy for the financial condition of the FDIC and relative size between the failed bank and the acquirer, are not found to have significant and consistent relation with discount. As expected, we document that discount can inflate the post-merger profitability of acquirers. Overall, our study provides insights about the intrinsic connection between the discount determinants and the features of the FDIC-assisted failed bank resolution