Critics Decry Closure of Small Minority Bank : Banking: Officials claim the liquidation of Freedom National shows that big institutions are protected while smaller ones are left to fail.

Federal regulators’ liquidation of tiny Freedom National Bank earlier this month has prompted a wave of protest from state and federal officials against what they call the government’s double standard for insolvent institutions.

In closing the bank, the Federal Deposit Insurance Corp. was unable to come up with a buyer. The FDIC’s $100,000 limit on guaranteed deposits caused painful losses to many charities that invested money at the bank, one of two black-owned banks in New York.

But critics assert the episode illustrates a federal policy that favors the giants and squeezes the meek. They say the FDIC has been much more accommodating to larger busted banks.

This week, Rep. Henry Gonzalez (D-Tex.), chairman of the House Banking Committee, and Rep. Charles Rangel (D-N.Y.) fired off separate letters to FDIC Chairman L. William Seidman asking for a full explanation of the circumstances surrounding Freedom’s liquidation.

New York state Atty. Gen. Robert Abrams also wrote to Seidman asking him to reimburse charitable organizations with accounts in Freedom.

Critics say federal regulators, in their handling of hundreds of troubled institutions these past two years, have pursued an unwritten “Too Big to Fail” doctrine. Regulators, critics say, will go all out to save large banks to prevent repercussions from rippling through the financial community.

Freedom’s lack of political and economic clout, they say, made it a candidate for a less common option--Too Small to Rescue.

“Freedom’s largest depositors stand to take substantial losses as a result of this kind of two-tiered policy--one for the larger banks and one for the smaller banks,” said Stephen Verdier, senior legislative council at Independent Bankers Assn. of America, a group representing community-based banks.

Following the Freedom liquidation, several large charitable groups--which provide programs including foster care, elderly services and housing assistance to crime victims--stand to lose hundreds of thousands of dollars in deposits.

These depositors were under the mistaken impression that as long as each of their accounts did not exceed the $100,000 limit covered by federal insurance, their deposits would be covered. But last Friday, the groups learned that the FDIC totaled all their accounts in applying the $100,000 cap. All told, roughly $11 million in 100 Freedom accounts exceeded the insurance limit, compared to about $80 million that was covered, according to the FDIC.

Some of the charities assert that their separate accounts are actually being held in trust for different depositors, which may enble the FDIC to apply a separate $100,000 cap to each account. The FDIC is looking into these claims.

Accounts of more than $100,000 often make it through a bank failure. In one recent case more typical of the way the FDIC handles insolvency, all depositors of the National Bank of Washington, D.C.--even those with accounts in a branch in the Bahamas--were able to recover their funds regardless of the size of their deposits.

In this instance, the FDIC arranged a sale of the $1.5 billion bank to Riggs National Bank of Washington, which took over the failed bank’s assets. In the process, the FDIC decided to cover $37 million in the failed bank’s Nassau, Bahamas branch.

The FDIC justified the decision at the time by saying it was meant to help soothe foreign investors, who account for a large percentage of deposits in big American banks.

But the decision was vigorously opposed by small banks, which are being hit hard by increases in their deposit insurance premiums.