House Panel Claims U.S. Won’t Let Big Banks Fail

A House panel that studied the bail-out of Continental Illinois National Bank said Sunday that, under a policy that is detrimental to small banks, federal regulators have decided not to let big banks fail.

The congressional study said the Continental Illinois assistance program developed last year by the Federal Deposit Insurance Corp. and other federal regulatory agencies indicates that certain banks are regarded as too big too fail.

With that in mind, the study said, “investors, creditors and borrowers are more likely to be impressed with the solidity and stability of a fail-safe bank, resulting in a competitive disadvantage in the funding and ultimately the profit arenas for banks that are not fail-safe.”

The study was done under the guidance of Rep. Fernand J. St Germain (D-R.I.), chairman of the House Banking, Finance and Urban Affairs Committee, who held hearings in 1984 on Continental Illinois’ financial problems.

“A year has passed and I am still not convinced that a $4.5-billion bail-out was all that stood between the safety and soundness of the financial system and the doomsday scenarios of our federal regulators,” St Germain said.

Banking System Not Threatened

“Indeed, the banking system would have survived, Continental’s 2,000 or so correspondent banks--the FDIC could never produce the exact number--would have survived and the American taxpayer would have survived without another government handout,” he said in releasing the report Sunday.

In July, 1984, the FDIC announced a permanent assistance package for Continental Illinois, consisting of installation of a new management team, removal of $4.5 billion in problem loans, infusion of $1 billion in new capital and maintenance of credit lines from major banks and the Federal Reserve.

The report said the bank’s problems were the direct result of top management’s decision to catapult the institution from being the eighth-ranked commercial lender to one of the country’s top three--in just six years.

It cited a failure by Ernst & Whinney, Continental Illinois’ independent certified public accountants, to detect the burgeoning problems of the bank and said the auditing profession ought to improve its oversight of large commercial banks.

The 202-page report also criticized what it called a policy developed by the FDIC and other federal bank regulatory agencies to save large banks. The policy arose from the Continental bail-out, the report said.

‘Inequitable’ Policy

“This policy is the result of a conscious policy of avoiding potential ripple effects in the economy of a large bank failure, and the FDIC’s professed administrative inability to pay off accounts in failed large banks,” the report said. Such a federal fail-safe policy is “inequitable in that stockholders in fail-safe banks are more likely to see their investments protected than are stockholders in banks that are allowed to fail,” the report said.

“Under current policies, depositors with more than the insured amount in their accounts are in effect fully insured in fail-safe banks, in contrast to their treatment when a small bank fails and they are forced to endure delay and less-than-full recovery of their deposits,” the report said.

The report noted there is no legal limit on essential federal assistance to troubled banks, and the FDIC has said it would provide whatever capital help that Continental Illinois may need.