Last year's string of record-breaking bank mergers has prompted the Federal Deposit Insurance Co. to mull the unthinkable: the failure of a colossal bank.
An internal task force has been meeting quietly since July to discuss what the FDIC would do if, for instance, a $100 billion-asset bank were to fail.
Though agency officials do not foresee any big banks failing anytime soon, they also do not want to be caught short.
"It's better to do this now than to wait until you're on the line staring a failure in the face," said Gail L. Patelunas, chairwoman of the megamerger committee and deputy director of the FDIC's division of resolutions and receiverships.
Regulators have repeatedly expressed confidence that they can supervise megabanks. And some economists have said bigger banks are actually less likely to fail because their assets, geography, and business mix are very diverse.
Still, regulators have conceded that the collapse of a megabank could be significantly more disruptive to the economy than past failures have been.
With that in mind, the FDIC has formed what is known informally as the "megamerger committee." The group is debating every angle of a mega- receivership.
Under what circumstances should the government, to avoid systemic upheaval, pledge to refund uninsured deposits?
Who is best qualified to manage a failed bank's derivatives portfolio until it can be auctioned off?
How many hundreds-or even thousands-of temporary staff would a downsized FDIC need to hire if a big bank failed, and where would they find the staff on such short notice?
Should the FDIC send employees overseas to monitor a failed bank's foreign branches?
The full committee has met only four times, but participants said the outlines of a plan for resolving a superbank are taking shape.
For example, if a $100 billion-asset bank were to tank, the FDIC would almost undoubtedly break it into bite-size pieces to expand the pool of bidders, boost prices, and make the entire process more manageable. Only a few investors could afford to swallow such an institution whole, and the lack of competition could depress prices.
Exactly how to dismember the bank would depend on the situation, said John F. Bovenzi, director of the resolutions and receiverships division.
The bank could be cut up and marketed along geographic lines, for example, or business lines. Performing loans could be pooled and securitized.
As for specialized portfolios or products, Mr. Bovenzi said, the agency could recruit private-sector experts, including former employees of the defunct bank.
"We don't pretend that we would have every bit of expertise in-house for every nuance," he added.
Many of the committee members have ground-level experience with failed banks. For example, Ms. Patelunas was part of the FDIC team that resolved $22 billion-asset Bank of New England in 1991, the third-largest U.S. bank ever to fail.
Even that relatively small failure hurt the region's economy, she said.
Yet the nation's biggest banks have grown significantly larger since Bank of New England bit the dust.
At the end of 1984, a quarter of all U.S. deposits were held by the 42 biggest banking and thrift companies, according to the FDIC. Six years later, it took 25 holding companies to reach that threshold.
Today just six companies hold a quarter of domestic deposits, assuming all pending mergers are approved.
Asset size has undergone a similarly explosive transformation. Since 1993, the combined assets of the five largest bank holding companies has more than doubled, reaching $1.8 trillion on Sept. 30.
Despite its lofty goal, the megamerger committee has maintained a very low profile. It has yet to present its findings to the FDIC's board of directors, has no dedicated staff, and remains unknown to even some high- level agency officials.
Nor has its leadership reached out to the Federal Reserve Board, a key partner in any failure scenario.
While the group operates with the approval of FDIC Chairman Donna A. Tanoue, Ms. Tanoue was not responsible for creating it and has not attended any of its meetings.
However, if the economy were to falter and drag banks down with it, the megamerger committee's visibility would likely grow.
In the meantime, its members are busy visualizing disaster.
Most work at the 16-member group is being done in subcommittees, of which there are eight.
One subcommittee discusses the types of resolution systems that might be used if a huge institution began to fail. In many cases, the agency would likely create a "bridge bank," a temporary structure that would buy the FDIC time to stabilize the failing bank and market its assets.
A second is surveying the legal and regulatory obstacles to closing bank branches located on foreign soil, while a third is examining the potential effect of a big bank failure on capital markets.
Other subcommittees are reviewing how to:
Handle the "too big to fail" doctrine.
Fund a mega-resolution.
Gather the data needed to appraise and sell assets.
Communicate with a failed bank's vast computer and ATM networks.
Coordinate the movements of thousands of regulatory and industry players across multiple time zones and international borders.
The subcommittees have their work cut out for them.
The largest bank ever resolved, Continental Illinois National Bank and Trust, Chicago, had a relatively paltry $34 billion of assets when it failed in 1984.
Today's megabanks are not only much larger than that, but more complex. They sell mutual funds and other nonbanking products, hold complicated investments like derivatives and other hedges, and have extensive ATM networks. They also operate more branches overseas.
At the same time, Ms. Patelunas said, laws enacted in the wake of the 1980s bank and thrift woes have changed the legal landscape for the FDIC.
By law, for example, the agency has to select the least costly resolution method. That means the agency not only has to minimize costs but maximize income from the sale of assets.
Moreover, any decision to repay uninsured deposits now has to be approved by both the Fed and the Secretary of the Treasury.
Ratcheting up for a big bank failure also would be a human resources challenge. The FDIC has barely half the 14,350 employees it did in 1990 and could shrink to 6,600 by 2001.
Yet committee members say the FDIC is up to the task.
Between 1989 and 1995, the former Resolution Trust Corp. handled $400 billion worth of assets, said Mr. Bovenzi.
Over a similar period, the FDIC handled over $300 billion.
"It's not like it's a brand new effort, starting from scratch," he said. "We do have standard approaches."
"Will we have a perfect answer?," said Ms. Patelunas. "No. But the more thought and planning we have, the better we'll do" if and when that jumbo bank tumbles out of the sky.