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. (Under the law, the cost of any such rescue would be paid for by special assessments on insured institutions.)

Government rescues have changed since Continental Illinois was bailed out in 1984 and must continue to evolve as the banking, securities, and insurance businesses meld.

For instance, no government funds were spent when Long-Term Capital Management was pulled back from the brink of failure last year, but the hedge fund would not have survived if the New York Fed had not coordinated a bailout by creditors.

"Long-Term Capital proved that 'too big to fail' does not apply just to banks," said Bert Ely, an industry consultant in Alexandria, Va. "As consolidation and conglomeration occur, this will become more of an issue."

Though Congress did not tackle this thorny question head-on, Rep. Leach said the new financial reform law tries to curb "too big to fail."

The new law gives the Fed and the Treasury until May 12, 2001, to recommend ways Congress could use the market to discipline large banks. The law suggests requiring large banks and their parent companies to hold some portion of their capital as subordinated debt. The price paid for this debt would reflect the market's judgment of the institution's riskiness. Presumably, banks taking too much risk would be unable to find buyers for their debt - and that would raise a red flag to regulators.

Rep. Leach also said the law prevents further mingling of banking and commerce by barring nonfinancial firms from chartering any more thrifts or buying existing ones. The federal antitrust laws were strengthened to ensure mergers are scrutinized, he added.

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