WITH THE rescue of the Bank of New England Corp., federal banking regulators fixed one problem -- and laid bare another. Over the weekend, the Federal Deposit Insurance Corp. decided to save the three affiliated banks of New England's third largest bank holding company -- at an ultimate price tag of $2.3 billion -- and to extend the government's safety net to all depositors, including those with accounts exceeding the $100,000 federal deposit insurance limit. It had little choice in the face of a run on the banking company's deposits and an obvious erosion of confidence in the region's troubled banking system. However, when confronted last November with the imminent failure of the much smaller Freedom National Bank in Harlem, and with no apparent buyers for the bank, the FDIC decided to liquidate Freedom National and give the uninsured depositors only 50 cents on the dollar.

Is this equitable treatment? No. FDIC Chairman L. William Seidman, whose agency engineered both plans, acknowledges as much. But "that's the law," he says, referring to the "essentiality" test in the deposit insurance statute. In deciding how to handle insolvent federally insured institutions, this test requires the FDIC to consider factors such as local economic conditions, the availability of alternative financial services and the extent to which liquidation would disrupt or pose a substantial risk to a bank's service area or the financial system. As the Bank of New England and Freedom National Bank cases illustrate, however, all banks are not treated alike. Some are considered too big to fail and others too small to save.

And full government protection is not limited to uninsured domestic deposits. The FDIC gave similar protection to $600 million of Bank of New England's offshore deposits. Last year the FDIC also bailed out $37 million in foreign deposits of the collapsed National Bank of Washington. This is, in effect, 100 percent coverage for deposits on which no insurance premium is paid. With the nine largest U.S. banks having about 51 percent of their deposits in foreign markets, the FDIC reasons that failure to cover foreign deposits in banks such as NBW and the Bank of New England could spark a disastrous run on the large U.S. money center banks.

Administering the statute with the fear of systemic failure in mind provides a real boon to investors in uninsured deposits, who may now safely assume that they are immune from loss and beyond the discipline of the market. But their gift of full government protection is an unfair government penalty imposed on similar depositors in smaller banks. We have in mind depositors such as the United Negro College Fund and other charitable groups, which had more than $100,000 in accounts with Freedom National Bank and thus were forced to swallow losses. Fortunately, this is an unfair situation that no one likes -- not the banking regulators, the Treasury Department or Congress. That makes it all the more likely that a remedy will be included in the major banking reform package President Bush is expected to unveil in a few weeks.