What happens to stock-as-collateral if your bank is taken over by the FDIC?
July 2nd, 2009
My dad took out a loan from a bank for the purpose of purchasing stock in another bank, and used his existing stock, plus what he just bought, as collateral on the loan. The lending bank is currently in possession of all his stock certificates, and has ,000 left on the loan (which is less than 1/10th of the value of the stock). It was announced last week that the FDIC is taking over the lending bank. Is he in danger of losing all of his stock holdings?
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Posted in Financial Questions | 
Tags: collateral, dad, fdic, possession, stock certificates, stock holdings
His loan remains in force. It will be assumed by another bank.
With bankruptcies and FDIC takeovers, investors in the bank can lose money. This means the stockholders and bondholders of the failed bank. Your dad is not an investor; he is a customer.
I see two possible scenarios:
1) Most of the time, the FDIC seeks (and almost always finds) a buyer for the bank’s assets and liabilities. In this case, nothing is affected.
2) The FDIC may have to liquidate the bank. They may ask for the loan repayment sooner, and if your dad can’t pay they will liquidate some of the stock to make up the difference.
If your dad had borrowed from a good bank to buy stock in a bank that later was taken over by the FDIC, then he would have taken a big hit.
One thing, the FDIC has a lot of power, so I’m not 100% sure on the process. Regardless, I wouldn’t worry too much. It is no different than if your Dad owed $12k on a $120k mortgage, in which case he obviously wouldn’t lose the house.