Regional Asset Liquidation Agreement (RALA)

A Regional Asset Liquidation Agreement (RALA) is an agreement between an asset manager and the Federal Deposit Insurance Corporation (FDIC) for the disposition of an insolvent bank’s assets. It was used four times between 1992 and 1993 to dispose of the distressed assets and nonperforming loans of small financial institutions.

A Regional Asset Liquidation Agreement, according to the FDIC, "was an asset management and disposition contract with an independent entity (contractor) for the resolution of asset pools acquired by the FDIC. A RALA contract was awarded subsequent to and apart from the resolution process. Assets in the pool were specified by the FDIC, and the asset pool was not associated with any single institution."

When a financial institution fails, it is generally in the best interest of the government to wind down the institution as quickly as possible. The longer it takes to sell off nonperforming loans and distressed assets, the greater the opportunity for other banks to run into financial trouble as well. This can have a chilling effect on the local and regional economies, as individuals are unsure of the safety of their deposits and businesses are unsure whether they will be able to continue to obtain loans or credit to maintain operations.

Regional Asset Liquidation Agreements were created by the FDIC in 1992 to dispose of troubled assets. Unlike the Asset Liquidation Agreement's (ALA) previous asset disposal contracts, RALA specifically applied to smaller asset pools, less than $500 million. The two also have different compensation arrangements. 

ALA agreements are cost-plus compensation, which allows an asset manager to be reimbursed for expenses plus a percentage of net collections, asset managers were compensated based on the amount of assets they were able to sell. ALA agreements have incentive fees that are scaled; the higher the collections the higher the fee. This made the contract a performance contract.

The amount of an insolvent bank’s assets that an asset manager, under a RALA contract, was estimated to sell off was called the initial targeted cash value (ITCV). With RALA contracts, bidders were allowed to edit initial targeted cash value. Asset managers were instructed to capture as much of the present value of those assets as possible. The asset managers were paid on net collections, with the asset manager collecting more fees if the assets were sold with fewer expenses attached. Assets that were not sold were returned to the FDIC.