In Case of Big-Bank Failure ... as New Giants Arise from Interstate Banking, So Do Concerns

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WASHINGTON -- Will interstate banking result in a surge of banks too large to be permitted to fail?

The answer is a qualified yes, among banking experts interviewed. Thanks to recent interstate mergers -- and many more in the works -- more and more banks are approaching sizes where takeover candidates with enough capital would be scarce and insured payoffs would overwhelm the Federal Deposit Insurance Corp. fund.

That's one of the ironic twists behind the push for "market discipline" and calls for deregulation. Should one or more of the growing number of big U.S. banks get into serious trouble, the government could be forced to ante up billions of dollars to keep the institutions afloat while searching for a permanent solution.

Following the collapse of the $40 billion Continental Illinois National Bank and Trust Co. last year, about a dozen banks with deposits exceeding $20 billion were unofficially listed as "too big to fail."

Now that number may balloon, banking officials suggest. Regional compacts have produced a flurry bof big interstate mergers, with many consolidations by banks of between $5 billion and $10 billion in deposits. Many banks, in effect, are doubling their size in a hurry.

The question of big bank failures still is only whispered here in the nation's capital. Publicly, only a few federal regulators and elected officials have raised the issue. But dozens of banking trade group researchers and some of the biggest banks, which have some very big interests to protect, are scrambling to publish white papers and influence government officials before passage of any new laws decides the matter.

That some banks can fail while others cannot is an industry inequity that -- ever since Continental Illinois -- bothers the thousands of smaller and regional banks. They view the problem as discrimination against smaller institutions that could eventually hurt their ability to compete for deposits.

Others believe any bank can be allowed to fail as long as its troubles are caught by regulators soon enough. Then, says H. Rodgin Cohen, a lawyer with the New York law firm of Sullivan & Cromwell and a veteran of the Continental Illinois bailout, there may be time for the institution to be sold off before it gets in worse shape. The move to interstate banking, he suggests, should make takeovers of large, troubled institutions easier than under current banking structures.

Martha Seger, the Federal Reserve governor, likes the idea of interstate banking, but, as a regulator, concedes that a proliferation of giant banks is unsettling.

"Would interstate banking result in the formation of banks that would be too large to be permitted to fail? Certainly, over time, the largest banks would be much larger -- on a relative basis -- than the largest banks today," she told bankers earlier this year.

"there would be few potential acquirers of a failed giant nationwide firm."

In an interview, Stanley C. Silverberg, director of the FDIC's division of research and strategic planning, said interstate banking will actually aid the handling of banks with $5 billion in deposits and more because more banks will be able to bid for a troubled institution before it fails. "Interstate provides flexibility," he says.

But Mr. Silverberg concedes there will be problems in dealing with the largest banks. "At some point in size, it is a negative. I do not know what the magic number is in terms of how big an institution is," before finding a solution becomes difficult.

Nevertheless, Federal Reserve Chairman Paul A . Volcker sees merit in interstate banking. Outgoing FDIC Chairman William Isaac has pushed the idea, and his designated successor, William Seidman, is known to be an interstate advocate. Acting Comptroller of the Currency H. Joe Selby endorses similar positions, as do Reagan administration officials.

Too-Big-to-Fail Total Could Top 30

Many banking observers argue that "too-big-to-fail" banks could increase in a few years from todayhs dozen to 25, 30 or more. …