Banks Too Big to Sink

The Texas banking crisis has driven home a controversial point: Some banks are simply too big to fail.

When First Republic in Dallas, the state’s biggest bank, veered to the brink of failure earlier this year, the Federal Deposit Insurance Corp. stepped in with aid and a blanket guarantee on all deposits, including those exceeding its $100,000 limit.

The guarantee helped stop the run of big corporate accounts that had drained the bank of more than $1 billion in deposits. A similar guarantee was used to stabilize First City Bank in Houston last year.

At the same time, smaller banks in Texas have been failing at the fastest rate in the nation and their executives, who form a powerful political lobby in Texas, have begun to complain about the inequity.

Texas Atty. Gen. Jim Mattox has raised the possibility that the state might sue the FDIC over the issue. And the federal regulators are sensitive to the criticism.

L. William Seidman, FDIC chairman, said in a recent speech in Toronto that the agency would study possible solutions. But he said the failure of a large bank, such as Continental Illinois in Chicago or First Republic, would cost billions of dollars and could destabilize the banking system.