In a May 31, 2012 study of the FDIC failed bank litigation that contains a number of interesting observations and projections, NERA Economic Consulting projects at the current filing rate, the FDIC’s failed bank litigation ultimately could total 86 lawsuits, or much as 20% of all banks that have failed as part of the current round of bank failures. The study, which is entitled “Trends in FDIC Professional Liability Litigation,” can be found here.


The NERA study is based on its analysis of all failed bank lawsuits through the end of the first quarter of 2012, at which time there were 27 lawsuits involving 26 failed banks. (Through May 30, 2012, there have been a total of 30 lawsuits involving 29 institutions.)


Based on lawsuit filing patterns through March 31, 2012, NERA projects that ultimately the FDIC will file 86 lawsuits in total, representing about 20% of all bank failures. Through the end of the first quarter, the FDIC had authorized lawsuit against 54 institutions, suggesting that the FDIC had authorized about 60% of the number of lawsuits that NERA projects the FDIC will file. (After the end of 1Q12, the FDIC increased the number of authorized lawsuits; through May 15, 2012, the FDIC had authorized lawsuits involving 63 failed institutions, or about 73% of the number of lawsuits that NERA projects ultimately will be filed.)


The 20% filing rate that NERA projects is slightly less than the 24% filing rate following the S&L crisis. However, despite this lower projected filing rate, NERA projects that the FDIC’s aggregate recoveries could approach recoveries during the S&L crisis. The recoveries following the S&L crisis totaled $1.3 billion, or $2.3 billion in inflation adjusted terms, while NERA projects aggregate recoveries from the current round of bank failure litigation of about $1.9 billion.


The NERA report notes that the banks failures that produced the largest losses to the deposit insurance fund are more likely to be the subject of litigation. Bank failures that caused losses to the deposit insurance fund of greater than $200 million have filing rates of 62%, while bank failures that produced losses to the deposit insurance fund of under $50 million have a filing rate of only about 3% For bank failures that produced deposit insurance fund losses of between $50 million and $200 million, the filing rate has been about 19%.


The lower filing rate with respect to banks whose failure caused deposit insurance fund losses under $50 million could impact the number of future filings, Since the third quarter of 2010, the average deposit insurance fund losses per failed institution has dropped significantly, and for many of the banks that have failed most recently, the losses were below $50 million, suggesting a much lower likelihood that many of the most recent bank failures ultimately will involve litigation.


On the other hand, NERA’s analysis suggests that litigation involving some of the largest bank failures to date has yet to be filed, especially when the aggregate losses claimed in lawsuits already filed is compared to the FDIC’s projection of aggregate losses involved in all authorized lawsuits. NERA reckons claims involving some of the largest failed losses may be about to be filed. In terms of losses to the deposit insurance fund, the four largest bank failures that have not yet seen litigation are BankUnited ($5.8 billion in deposit insurance fund losses); Colonial Bank ($4.2 billion); Amtrust Bank ($2,5 billion); and United Commercial ($2.5 billion).


Comparing the bank failures by state to the lawsuits filed so far by state, the NERA report suggests that there have been relatively high litigation levels in Illinois, Nevada, North Carolina, and Puerto Rico, while filings in California and Florida are fewer than the number of bank failures in those states would suggest. In Minnesota, Missouri and Arizona, there have not yet been any lawsuits filed even though those states are among the top ten in terms of bank failures. However, the study notes based on the date of bank failures in those states that litigation involving failed banks in those states is not projected until after the end of the first quarter of 2012.