What it means
When a bank fails, someone must decide what its loans, securities and property are actually worth, and fast. The asset valuation review is that decision process.
Run by the resolution authority, in the United States the FDIC, it produces the reserve prices used when healthier institutions bid for the failed bank's assets. Speed and consistency drive the method.
A failed bank's loan book can hold thousands of credits, far too many to appraise one by one over a weekend, so the review values the portfolio through sampling, typically a stratified random sample, and automates as much of the work as possible. Stratification does the heavy lifting.
Assets are grouped into pools by type and quality, each pool is priced from its sample, and the pools are cross-matched to bidders according to their appetites, while the largest individual loans still get direct, granular evaluation because their weight in the total justifies the time. The output shapes the resolution.
The review's estimates set the floor the regulator will accept, and bidders sharpen their offers against that floor. The goal is to end the liquidation quickly with the least cost to the deposit insurance fund, sometimes with the FDIC offering capital loss coverage to make the transaction attractive.
The stakes are historic, since thousands of US banks failed during the early 1930s and depositors lost heavily, which is why the FDIC was created in 1933. Contrast AVR with two neighbours: it is not asset valuation in the ordinary sense, which prices assets for reporting or sale in a going concern, and it is not the asset valuation reserve, an insurance capital buffer that shares the same acronym.
The review is a one-time, failure-driven valuation exercise run under resolution pressure. The same sampling discipline carries into the work of contractors who later manage and sell the assets, since they inherit pool-level data produced by the review.
In practice
Real-world examples.
Example
A regulator prices a failed bank's consumer loan pool by sampling 400 of its 9,000 accounts and scaling the sample's recovery rates to the whole pool. The result gives bidders a consistent starting point for the entire pool.
Example
The review team values a failed bank's largest commercial property loan directly with outside appraisers instead of including it in the sample. Its size means a sampling error would move the total too much.
Example
Two bidding banks receive the same pool-level data from the review, and the one with better workout capability bids above the floor for the mortgage pools. Its collections team expects to recover more than the sample implied.
Formula
Calculation
The mechanics are sampling statistics applied to a loan book. Divide the portfolio into strata by asset type and risk, draw a random sample from each stratum, value the sample loans individually, and gross up each stratum's sample value to its full population. Sum the strata, add the directly valued large loans, and then set pool-level floor prices.
Worked example. A consumer loan pool holds 9,000 loans averaging $10,000 each, a total book value of $90,000,000. The team samples 400 loans, with a book value of $4,000,000, and estimates recoveries of $3,000,000 on them.
- Sample recovery rate: $3,000,000 / $4,000,000 = 75%
- Estimated pool value: 75% x $90,000,000 = $67,500,000
- A $12,000,000 commercial property loan is valued directly at 60%, or $7,200,000
- Combined estimate: $67,500,000 + $7,200,000 = $74,700,000, which then informs the floor prices.Case study
Seen in the real world.
This fictional case study shows the process under deadline. Fictional Prairie State Bank fails on a Friday. The FDIC's review team stratifies its $800 million loan book into 12 pools, samples 8% of loans in each, and values the ten largest credits directly.
By Sunday it sets floor prices, three bidding banks receive pool data, and the winning bid transfers most assets before Monday's opening. In this illustrative story, the floor for the residential mortgage pools is set at 70 cents on the dollar and the winning bidder offers 74 cents, so the deposit insurance fund recovers more than the floor. The review's job was not to predict the exact price but to give the regulator a defensible minimum under extreme time pressure.
Watch out
Common mistakes.
- Confusing the review with the asset valuation reserve. They share the AVR acronym, but one is a failed-bank valuation process and the other is an insurer's capital buffer.
- Treating sample estimates as exact. Stratified sampling gives ranges, so floor prices and bids must leave room for valuation error.
- Valuing every loan individually. That ignores the deadline pressure of a resolution, which is why the process uses sampling for the bulk and direct review only for the largest exposures.
Questions
People also ask.
Who performs an asset valuation review?
The resolution authority responsible for the failed bank. In the United States that is the FDIC, often working with contracted valuation specialists. Speed is the binding constraint throughout.
Why does the review use sampling?
A failed bank can hold thousands of loans and the resolution must finish in days. Stratified random sampling produces defensible portfolio values at that speed, with the largest loans reviewed individually.
What does the review's output do?
It sets the minimum prices the regulator will accept from bidders for the failed bank's asset pools, aiming for a fast resolution at the least cost to the deposit insurance fund. Offers below the floor are normally rejected unless no better bid emerges and delay would cost the fund more.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related