If a Mega Bank Fails, Who Pays?

What would it mean for US taxpayers if one of the nation's new mega-banks were to stumble and fail?

After all, Uncle Sam has guaranteed US bank deposits ever since the dark days of the Depression. That's what the Federal Deposit Insurance Corporation (FDIC) is for - to reassure the folks standing in the teller line that they'll get their money back even if their bank goes under.

That was an easy promise to make when most banks were small institutions that barely bestrode a city. But as this week's wave of announced bank mergers makes clear, US banks will soon have the heft and reach of Ford Motor, or Microsoft.

If one of these behemoths collapses, some lawmakers and analysts warn, the financial consequences for Washington could be severe.

Others say such worries are premature and overblown. But most observers here agree on one point: The march of banks down the aisle shows again how the fast-moving finance sector outpaces Washington, forcing both Congress and bank regulators to scramble for relevance.

"It might be time to ask the question, 'What about federal deposit insurance? How essential is it in the modern financial system?'" says James Barth, finance professor at Auburn University in Auburn, Ala..

The announced mergers of Citicorp with Travelers Group, BankAmerica Corp. with Nationsbank Corp., and Banc One Corp. with First Chicago NBD Corp. are only the beginning of consolidation in the financial market, say experts. Other banks will probably plan pairings of their own to compete in the new world of cross-country banks.

But failure of one of these institutions would quickly exhaust the FDIC, say some. Critics draw an analogy with the savings-and-loan crisis of the late 1980s. At least part of the reason for that debacle was the move of S&Ls beyond their traditional mortgage business into riskier ventures. Banks are now doing the same thing, as their holding companies expand into new areas such as securities and insurance.

"Something could go wrong with [mega-bank] expansion into noninsured products, which could cause them to fail and trigger a FDIC bailout of depositors," says Frank Torres, legislative counsel for Consumers Union.

The very size of the banks could work to taxpayer disadvantage, say other critics, increasing pressure for the US to prop them up by reimbursing accounts that aren't even covered by FDIC guarantees. Washington might be loath to stand by and watch the collapse of banks whose failure could affect all areas of the US.

"These banks will be on the 'Too Big to Fail' list," charges Sen. Byron Dorgan (D) of North Dakota.

IF nothing else, the spate of bank mergers could well make federal guarantees a national issue, say analysts.

Some suggest a balance between US support and free-market discipline. Gary Stern, president of the Federal Reserve Bank of Minneapolis, suggested recently that large account holders should have to bear some loss in a collapse - perhaps 20 percent of uninsured funds.

Mr. Stern also urged that regulators should require banks to disclose more information about their financial condition, and that the FDIC should require banks with a history of risky investments to pay high premiums for deposit insurance coverage.

Other analysts say that worrying whether the newly merged banks will be judged "too big to fail" is beside the point.

"There's always the issues as to whether big institutions are too big to fail," says Professor Barth.

Chrysler Corp. was considered too big to fail, and earned government loan guarantees that had nothing to do with FDIC insurance. Would the US stand by and do nothing if, say, a huge mutual fund company became shaky? The collapse of such a firm would risk billions in individual accounts - none of it covered by explicit government guarantees.

"Where does one draw the line?" asks Barth.

Congress is already wrestling with legislation that would revamp decades-old US banking laws. Now some lawmakers are talking about restricting future bank mergers as well.

Not all are farm-state populists, banking's traditional congressional adversaries. Sen. Arlen Specter (R) of Pennsylvania said this week that the trend toward bigger banks merits congressional attention.

"I'm skeptical about the public interest being served," he said.