Magazine article American Banker

Reform Law Leaves the 'Too Big' Picture Too Fuzzy, Critics Say

Magazine article American Banker

Reform Law Leaves the 'Too Big' Picture Too Fuzzy, Critics Say

Article excerpt

In the early 1990s, a $200 billion-asset bank seemed, well, too big.

But today -- after a dizzying round of megamergers -- banks are three times that size.

And tomorrow? The sweeping financial reform bill enacted Nov. 12 is widely expected to spur another ferocious bout of dealmaking, this time involving not just banks but also securities firms and insurance companies.

Will conglomerates of the future -- say, a combined Chase Manhattan Corp., Merrill Lynch & Co., and American International Group Inc. with assets approaching $1 trillion -- be too big to fail?

Critics say Congress missed a perfect opportunity -- a time of economic prosperity and record industry profits -- to make it clear that the government will not rescue financial Goliaths if they get into trouble.

"In trying circumstances, the consequences of failing to deal with this issue could be extremely severe," Sen. Paul Sarbanes, D-Md., warned Nov. 4 as the Senate voted on financial reform legislation.

House Banking Committee Chairman Jim Leach said investors will never be convinced that the U.S. government would let a big financial firm collapse. "The 'too big to fail' problem exists in modern-day financial services despite all desires to the contrary," the Iowa Republican told American Banker.

Still, policymakers insist that Congress already closed the ''too big to fail'' loophole in the Federal Deposit Insurance Corp. Improvement Act of 1991. "There is no such thing as too big to fail," William A. McDonough, the Federal Reserve Bank of New York president, declared after a recent speech.

In that 1991 law, Congress said the FDIC may not protect uninsured depositors or nondeposit creditors when a bank fails. However, it includes a "systemic risk exemption" that allows an individual institution to be saved if the Treasury Department, after consulting with the President, determines with the FDIC and the Federal Reserve Board that its folding would damage the economy. …

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