A top federal bank regulator said today the government’s decision to protect even uninsured depositors in the failure of Bank of New England Corp. has stabilized the bank and ended runs by nervous depositors.
“This decision was a judgment--no one can prove that it was right or wrong,” L. William Seidman, Federal Deposit Insurance Corp. chairman, said in prepared remarks for the Senate Banking Committee.
“It was our judgment that it was necessary to stabilize the banks, retain franchise value and cool runs. I’m pleased to report that so far it has worked,” he said.
Legally, federal insurance protects only $100,000 per account, and does not cover deposits in the banks’ foreign branches. However, Seidman said the board decided to protect all of the holding company’s $17 billion in deposits “because of the severe financial conditions in the region.”
Also, Seidman said the FDIC elected to assume all foreign exchange, interest rate swap and other financial contracts of the bank, even though it was legally entitled to assume only some of the contracts if that would save money.
In the Fed’s view, assuming the contracts was necessary “to avoid severely damaging the ability of American banks to operate in the foreign exchange markets and the ability of American industrial companies to obtain the foreign exchange services they need to compete effectively in international markets,” he said.