The 1991 banking law was designed to force regulators to intervene forcefully in troubled banks and to close the sickest. But the "too bit to fail" doctrine is not yet dead.

Come Jan. 1, 1995, the Federal Deposit Insurance Corp. will lose its unilateral authority to continue propping up big troubled banks because their collapse might adversely affect the economy or the banking system. But that practice can continue if approved by the Federal Reserve, the Treasury, and the President.

The bill is "riddled with loopholes," said Edward Kane, a professor at Ohio State University. "It becomes 'too political to fail.'"

The bill, signed into law Dec. 19 by President Bush, also makes it increasingly unlikely that the FDIC will continue fully to reimburse uninsured depositors of failed banks.

If the government does bail out a big bank, the cost to covering uninsured deposits must be be borne by all banks. The industry will be billed a special assessment to cover the costs.

Spur to Earlier Action

"Like never before, people are sensitive to making sure uninsured depositors are not protected," said Robert H. Dugger, chief economist at the American Banker Association.

Ross S. Delston, of counsel at Jones, Day, Reavis & Pogue in Washington, said he believes the new law may prompt regulators to move in and handle problem banks sooner.

"One effect could be to push the FDIC to act earlier for very large banks," Mr. Delston said.

The bill requires the FDIC to pick the cheapest method to resolve failed banks that are not considered essential to the economy or their communities. The agency was previously required to select a resolution method that cost less than liquidating a troubled institution but not necessarily the cheapest, overall.

Purchase-and-Assumption

That flexibility led the FDIC to handle most bank failures by turning over assets and liabilities to an acquirer, a so-called purchase-and-assumption deal. But these deals let uninsured depositors come through a bank failure whole.

As the FDIC's Bank Insurance Fund dwindled through the 1980s, the agency protected more than 99% of all deposits.

Angry lawmakers decided, however, that depositors with more than $100,000 should be protected only when the FDIC could prove it was the least costly way to handle a failed bank.

Altering Resolution Methods

Most agree that this least-cost provision will push the FDIC away from many purchase-and-assumption deals.

Kenneth A. Guenther, executive vice president at the Independent Bankers Association of America, said he believes the change will ultimately lead to more liquidations.

While he doesn't want to abolish too-big-to-fail, Mr. Guenther said, government officials should recognize that it makes large depositors more likely to put their funds in big banks.

L. William Siedman, a former FDIC chairman and a staunch defender of the too-big-to-fail policy, said he is glad Congress didn't outlaw it.

"They did the most they could without saying you can't help a major institution that gets in trouble," he said.

"I thought they arrived at a pretty good compromise," Mr. Seidman said.

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