To summarize the points we have made about loan losses:
All loan losses, large and small, come directly out of bank capital (i.e. the shareholder suffer the loss).
Moderate loan losses have the effect of restricting the amount of risk assets the bank can acquire.
Large loan losses can cause the bank's capital ratio to fall below required the required minimum. As a result, regulators would classify the bank is insolvent and take one of the following two actions:
Negotiate the sale of the failed bank's assets to another sound bank in exchange for the assumption of deposit liabilities and possibly other consideration.
If the FDIC cannot find a buyer for the bank, they might have to sell off the assets piecemeal and payoff depositors from their insurance reserve. Excessively large losses, from one or many banks, could potentially shift the liability to taxpayers.
