“Least Cost” Resolution

This Article reveals how a core principle of U.S. banking law unintentionally increases concentration, instability, and inequality in the financial system. Since the 1990s, Congress has instructed regulators to resolve a failed bank using the strategy—be it a merger or liquidation—that incurs the “least cost” to the federal Deposit Insurance Fund (DIF). The ensuing three decades have demonstrated that, although well intentioned, this least-cost requirement is flawed in two ways. First, the least-cost requirement overemphasizes costs to the DIF, which contrary to popular belief are not taxpayer money and cannot be predicted accurately. Second, it ignores other critical factors that regulators ought to consider when resolving a failed bank, including competition, financial stability, and financial inclusion. This Article traces the origins of the least-cost requirement and draws on case studies, including JPMorgan’s acquisition of First Republic Bank in 2023, to show how it has distorted bank resolution in undesirable ways. The Article contends that Congress should repeal the least-cost mandate to allow bank regulators to consider all relevant societal costs when deciding how to resolve a failed bank. Absent this reform, the least-cost requirement will inevitably lead to even more concentration, less inclusion, and increasing fragility in the financial system.