FDIC Gains Power to Pay More for Failed Banks to Prevent Mega-Bank Takeovers

The “Least Cost Exception Act” is a bill aimed at giving federal regulators more flexibility when a major bank fails. Currently, when the Federal Deposit Insurance Corporation (FDIC) steps in to resolve a failed bank, it is legally required to choose the resolution method that is the absolute least costly option for the Deposit Insurance Fund (DIF)—the fund that guarantees your deposits.

The New Rule: Trading Cost for Competition

This bill amends that core “least cost” rule by creating an exception. Essentially, the FDIC could choose a resolution method that costs the DIF more money than the cheapest alternative, if that extra cost is justified by the benefit of preventing the failed bank from being sold to a Global Systemically Important Banking Organization (G-SIB)—the industry term for the biggest, most interconnected banks. Think of this as the government saying, “We’ll pay a little extra now to keep the banking system from getting even more concentrated, which reduces future systemic risk.” This decision requires sign-off from the FDIC, the Federal Reserve, and the Treasury Secretary, acknowledging that this isn't a decision taken lightly.

The Catch: How Much Extra Can They Spend?

While the bill grants flexibility, it also sets up guardrails. First, the alternative method chosen must still be the least costly option among all choices that do not involve a G-SIB takeover. Second, the FDIC must issue a rule within one year setting the maximum allowable cost—a cap on how much of the DIF’s net worth can be used for this exception. This is critical because the DIF is funded by assessments on banks, and excessive losses could eventually lead to higher costs for the financial industry, which often get passed on to consumers.

Who Pays the Difference?

Perhaps the most interesting provision is the payback mechanism. If the FDIC uses this exception and chooses a buyer that is not a G-SIB, that buyer must agree to pay a special assessment back to the DIF. This payment must cover the difference between the cost of their chosen method and the cost of the absolute cheapest alternative (the one involving the G-SIB). These payments must be made over at least five years, discounted to reflect a “realistic discount rate.” This means if the government pays $500 million extra to avoid a G-SIB takeover, the non-G-SIB buyer must pay that $500 million back to the fund over time. This structure attempts to make the exception cost-neutral in the long run.

Real-World Impact: Less Concentration, More Discretion

For everyday people, this bill is about who holds the power in the financial world. When a bank fails, the cheapest resolution is often selling it to the biggest player in the room (a G-SIB). This bill gives regulators a tool to push back against that trend, potentially keeping smaller regional banks—which often have closer ties to local businesses and communities—in the game, rather than letting the biggest banks swallow up all the competition. However, the bill introduces a degree of subjectivity. The decision relies on regulators determining that the “benefits of preventing further concentration” outweigh the immediate cost to the DIF. This grants the FDIC, Fed, and Treasury significant discretionary authority, meaning they can choose a more expensive path based on a subjective judgment about systemic risk. While the goal is good—limiting mega-bank power—it means the Deposit Insurance Fund might take a bigger hit upfront, even with the promise of future repayment.