Breakingviews: Saving depositors is exercise in squaring circles

Big decisions are best made in calm times. That’s not an option for regulators cleaning up the mess caused by the collapse of two U.S. banks in March. A one-off charge levied on big lenders to cover the cost of those failures is a taster of the kind of trade-offs watchdogs and politicians must juggle.

Winding up Silicon Valley Bank and Signature Bank left a $15.8 billion hole in the fund the Federal Deposit Insurance Corporation uses to pay back savers when a lender implodes. Because regulators bailed out uninsured depositors – customers with balances above $250,000 – the rules require the FDIC to fill the hole. That part is straightforward.

The hard bit is deciding who pays. The FDIC said on Thursday it will levy the charge based on uninsured deposits, at an annual rate of 0.125% for two years. That’s different from normal payments into the fund, which are calculated according to lenders’ total liabilities. Based roughly on year-end filings, JPMorgan would pay $1.3 billion a year, and Bank of America around $1 billion.

Using uninsured deposits as the denominator makes sense: those customers caused runs at SVB and Signature. Then again, banks more reliant on uninsured deposits are also the most vulnerable. If First Republic had not failed earlier this month it would have been on the hook for about $140 million, or almost one-tenth of its 2022 earnings. By contrast, JPMorgan’s charge is around 3%. The levy is based on year-end data, so doesn’t reward banks which have de-risked their balance sheets.

The much bigger trade-offs come later. At some point Congress will decide whether to increase the deposit insurance limit above $250,000. Extending insurance to everyone will remove any incentive for wealthy savers to do basic homework about whether a bank is sensibly managed. But leave the cap where it is, and mid-sized lenders will remain vulnerable. There’s also the question of whether to spread the cost differently. Big banks like JPMorgan need deposit insurance less than their smaller regional rivals, yet the latter tend to have strong political connections.

If the goal is to reduce complacency, the deposit insurance limit is best left alone. The optimum state would be one where banks can safely fail, not one where they can’t fail at all. That probably means accepting big banks will get bigger – and that there’s no way for bank watchdogs to please all of the people all of the time.

(The third paragraph and context news  of this story has been corrected to say that FDIC levy is an annual rate applied over two years.)