Least Cost Exception Act
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Would let the FDIC choose a bank-resolution method other than the cheapest one when a bank fails, if doing so avoids further concentrating the failed bank's assets into the largest global banks.
The change targets a narrow but consequential feature of bank-failure law: it would give the FDIC discretion to favor smaller or regional acquirers over the largest institutions, provided strict cost and reporting safeguards are met.
What this bill would do
What it would do
The bill would amend the Federal Deposit Insurance Act's "least-cost resolution" requirement, which currently forces the FDIC to choose whichever method of resolving a failed insured bank costs its Deposit Insurance Fund the least. It would let the FDIC pick a costlier alternative if that alternative avoids a sale to a global systemically important bank, if the FDIC and Federal Reserve jointly determine the added risk to the fund is outweighed by the benefit of limiting further concentration among the largest banks, and if the cost gap stays under a maximum the FDIC must set by rule within one year.
If the alternative involves another party buying assets or assuming deposits, that party must pay the FDIC an assessment over at least five years covering the cost difference. The FDIC would have to report to congressional banking committees within 30 days of using this exception, detailing the cost difference from the least-costly option. The bill does not change resolution methods generally or eliminate the least-cost standard for ordinary bank failures.
Key provisions
- 1Would let the FDIC select a bank-resolution alternative that is not the least costly to the Deposit Insurance Fund, under specified conditions
- 2Requires the alternative be the least-costly option among those not involving a global systemically important bank and not exceeding liquidation cost
- 3Requires the FDIC to set by rule, within one year, the maximum allowable cost gap permitted under the exception
- 4Requires any party acquiring assets or assuming liabilities under the exception to pay the FDIC an assessment over at least five years
- 5Requires FDIC and Federal Reserve, after consulting Treasury, to determine that limiting bank concentration benefits outweigh fund risks before using the exception
- 6Requires the FDIC to report to House and Senate banking committees within 30 days of using the exception, detailing the cost difference
Who would be affected
The Federal Deposit Insurance Corporation, the Federal Reserve, and the Treasury Department, which would jointly evaluate whether to use the exception; failed insured depository institutions and their depositors; global systemically important banks that might otherwise acquire failed banks' assets; and smaller or regional banks and other buyers that could instead acquire those assets and pay the resulting FDIC assessment.
Why it matters
Under current law the cheapest resolution often favors sales to the largest banks, since they can most easily absorb failed institutions' assets. The exception would give regulators a tool to steer failed-bank resolutions toward other buyers to limit further concentration, though any added cost to the Deposit Insurance Fund — ultimately backed by bank assessments — would be capped and reported to Congress.
What would change
Changes to existing law
Amends Federal Deposit Insurance Act, Section 13(c)(4) (12 U.S.C. 1823(c)(4)) (Sec. 2(a))
Adds a new subparagraph allowing the FDIC to bypass the least-cost resolution requirement to avoid further concentration among global systemically important banks, subject to conditions.
Agencies directed to act
Effective dates
- FDIC must establish by rule the maximum allowable cost gap criteria for the exception
- FDIC must establish by rule the criteria for calculating acquiring-party assessments
- FDIC must report to Congress after using the least-cost exception
How implementation would work
Within one year of enactment, the FDIC must issue rules setting the maximum allowable cost gap the exception can tolerate and the criteria for calculating assessments paid by parties who acquire assets or deposits under the exception. When the FDIC invokes the exception, it and the Federal Reserve, after consulting Treasury, must jointly determine the benefits of limiting concentration outweigh the fund's added risk. Any acquiring party must pay an assessment to the FDIC over at least five years covering the cost difference. Within 30 days of selecting such an alternative, the FDIC must report to the House Financial Services and Senate Banking Committees analyzing the economic cost difference versus the least-costly option.
Legislative status & sources
Latest action
Placed on the Union Calendar, Calendar No. 405.
Official CRS summary
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This bill allows the Federal Deposit Insurance Corporation (FDIC) to waive the least-cost resolution requirement for failed insured depository institutions and use alternative methods of resolution, particularly alternatives that do not involve global systemically important banks (G-SIBs).
Under current law, the FDIC must use the resolution method (such as a deposit payoff or the purchase and assumption of a bank’s assets and liabilities) that costs the FDIC's Deposit Insurance Fund the least to implement when an insured depository institution fails.
The bill provides an exception to this requirement if the following criteria are met:
- the alternative method is the least costly of all alternatives that do not involve a G-SIB and that do not exceed the cost of liquidation;
- the difference in cost between the selected alternative and the cost of a resolution involving a purchase and assumption by a G-SIB is less than a maximum cost as established by rule;
- if the alternative involves a person purchasing assets or assuming liabilities, that person must pay an assessment to the FDIC; and
- it is determined that the risks to the fund are outweighed by the benefits of limiting the concentration of U.S. banking under G-SIBs.
FDIC must issue a report on any use of the exception established by this bill containing an analysis of the economic impact of cost differences between the selected alternative and the least-cost alternative.
Legislative subjects
Accounting and auditing; Bank accounts, deposits, capital; Banking and financial institutions regulation; Congressional oversight; Corporate finance and management; Federal Deposit Insurance Corporation (FDIC); Finance and Financial Sector; Performance measurement; User charges and fees
Committee report
H. Rept. 119-474