6. Dealing with a failed institution

Suppose WestBound Bank, which serves the entire Midwest, is failing, according to the CAMELS rating system. Suppose further that the failure of WestBound Bank appears likely to cause the failure of many financial institutions both in the Midwest and beyond and might even set off a financial panic internationally.

Which of the following scenarios is most likely to take place?

WestBound Bank would not be liquidated. Instead the FDIC, the Fed, and the U.S. Treasury would combine their efforts to find a way to inject capital into the bank.

The FDIC will find a healthy bank to purchase the failed WestBound Bank and assume all of WestBound Banks liabilities. As a result, no depositor would lose any of his or her deposits.

The FDIC will pay off the insured depositors to the stated maximum, currently $250,000. Uninsured depositors would obtain pennies on the dollar of deposits they had. Subordinated debt holders would be paid only after all of the depositors were paid in full, if possible.

This approach to a failing bank is called