Have Uninsured Depositors Become De Facto Insured?

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Have Uninsured Depositors Become De Facto Insured?

A recent New York University Law Review article raises a provocative — and well-documented — question: Why have uninsured depositors effectively stopped bearing losses when banks fail?

The short answer, according to the research, is not a change in the law — but a change in how failures are resolved.

The core finding

Formally, U.S. deposit insurance remains capped at $250,000. In practice, however, uninsured depositors have been almost entirely protected since the 2008 financial crisis.

The data are striking:

• Since 2008, uninsured depositors have taken losses in only about 6 percent of bank failures

• Over that same period, FDIC resolution costs nearly doubled compared to the pre-2008 era

• The author estimates roughly $45 billion in additional resolution costs, with only a small portion directly tied to payouts to uninsured depositors

• Most of the increased cost stems from inefficient resolution strategies, particularly whole-bank sales subsidized by the Deposit Insurance Fund

In other words, uninsured depositors are usually being protected — but indirectly, and at a much higher cost than necessary.

How this happens

Rather than allowing uninsured depositors to absorb losses or explicitly invoking the statutory systemic risk exception, the FDIC has increasingly relied on whole-bank purchase-and-assumption transactions. These transactions transfer all deposits — insured and uninsured — to an acquiring institution, often with a significant subsidy.

The article argues that this approach:

• Is frequently not the least-cost resolution method, despite statutory requirements

• Masks what is effectively near-universal deposit insurance

• Weakens market discipline while avoiding transparent policy choices

Why this matters

The author is careful not to argue that universal deposit insurance is necessarily wrong policy. Instead, the critique is about process and cost.

If policymakers want broader depositor protection, there are:

• More transparent approaches

• Less expensive mechanisms

• Clearer lines of accountability

The current system, by contrast, delivers near-universal protection through the most expensive and opaque path possible — a “worst of both worlds” outcome.

A familiar parallel for credit unions

For credit unions, there’s a parallel worth recognizing.

In some mergers, the premium paid for member shares exceeds uninsured deposits, effectively making uninsured members whole through the back door — with the NCUSIF bearing the cost.

I understand both sides of that debate. Having spent years working with this dynamic at NCUA, hearing this article discussed on a podcast immediately caught my attention. The banking-side analysis maps closely to issues credit unions have wrestled with for decades: market discipline, fund protection, fairness to surviving institutions, and whether indirect solutions quietly become permanent policy.

The takeaway

This article isn’t an argument for or against broader insurance coverage. It’s a reminder that how we achieve policy goals matters just as much as what those goals are — especially when insurance funds, incentives, and statutory mandates are involved.

For anyone focused on deposit insurance reform, bank or credit union resolution policy, or post-SVB lessons learned, it’s a thoughtful and timely read. 100-NYU-L-Rev-345