In a sign that the bank bill dims the outlook for weak banks, Moody's Investors Service announced it may downgrade some large U.S. banks in response to the legislation.

Legislative change spells trouble for weak banks because it means a safety cushion that creditors and depositors have relied on is now sprouting leaks.

"The world is getting a lot tougher for weak banks," said Christopher Mahoney, an associate director at Moody's.

'Too Big to Fail' Weakened

The problem: The bank bill weakens the "too big to fail" doctrine, under which regulators have protected large depositors and other creditors when major banks get into trouble.

"This may mean that some banks we thought would be protected under too-big-to-fail now would not be protected."

Moody's plans to study the bill and discuss it with lawyers and regulators before cutting any ratngs. Mr. Mahoney said he expects to complete the study during the first quarter of next year.

When the Deposit Insurance and Taxpayer Protection Act of 1991 was passed, the Federal Deposit Insurance Corp. had considerable flexibility in dealing with failed banks. Any way of dealing with a failed bank that cost less than liquidating it was allowed, if not encouraged.

The Old Methods

As it stands now, regulators have three basic ways to protect depositors. They can sell failed banks' uninsured deposits along with the insured deposits, help banks stay open long enough to allow them to unload their holdings, or pay off large depositors and creditors after troubled banks fail.

In effect, the old rules made it possible for the FDIC to pay off large depositors when a big bank failed. For example, the agency could find a buyer for the failed bank willing to pay a premium for the failed bank's franchise.

That way, the FDIC could use part of that premium to pay off large depositors and still have a resolution that cost less than liquidation.

But the new rule limits the FDIC's flexibility. Beginning in 1995, it requires the agency to use the least costly method of dealing with a failed bank, not just some less costly way.

And clearly, paying off depositors who are not legally entitled to such treatment is not a least-cost method of resolution.

Bailouts for Big Depositors

To be sure, the bill does not eliminate too-big-to-fail under all circumstances. For example, it would allow the FDIC to bail out large depositors if top regulators and government officials certify that following the rules would hurt the economy or the financial system.

"I think the biggest impact it has is on midsize and small institutions," said a lawyer who has studied the bill. "It will make it much harder for the FDIC to save these institutions wholesale."

But the legislators' interest in limiting payments to big depositors is clear, Mr. Mahoney said.

Other Agencies Less Worried

Other rating agencies are less concerned about the effects of the bank bill. At Standard & Poor's Corp., for example, analyst Tanya Azarchs said her agency's ratings are not based an any assumptions about government bailouts for large banks.

"We have not built too-big-to-fail into the ratings, so taking away too-big-to-fail wouldn't affect them," she said.

Similarly, Gregory Root, president of Thomson BankWatch, said his agency does not assume that large banks will be propped up by the government when it assigns ratings.

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