[benmmurphy]

It’s possible for the bank to capture a % of the deposit insurance by taking profit neutral risks. This is achieved by just increasing the risk. For example the profit neutral bet:

  0.5: 1
  0.5: -1

And the bet is made of 80% deposits 20% capital.

For the bank the profit before paying interest to depositors:

  0.5 * 1 - 0.2 * 0.5 = 0.4

The bet is profit neutral but the banks profit comes from increasing the risk of triggering the insurance.

For the insurer the cost is: 0.5 * -1* 0.8 = -0.4

If you want to run a ‘scam’ bank that makes money from looting the FDIC fund then having your capital going to zero sometimes is part of the cost of doing business. This is why it’s important for the insurer to try and control risk and insure there is enough capital so the loot equation does not work.