Are Some Banks Really Too Big To Fail?: Regulators' Answer: Maybe Yes, Maybe No
On July 4,1982, leading bank regulators met at the Federal Reserve to decide whether the failure of a little-known bank in an Oklahoma shopping mall would break the U.S. financial system.</br></br>Paul Volcker, then Federal Reserve chairman, feared that it could because the largest deposits in the bankÛÓthose over $100,000ÛÓ were not fully covered by federal deposit insurance. Fearing that losses and panic could spread to other banks, Volcker favored a federal rescue plan. He said that to do otherwise risked disrupting commercial transactions, causing Depression-style lines at banks and undermining faith in the financial system.</br></br>William M. Isaac, then chairman of the Federal Deposit Insurance Corp., wanted to let the bank fail, to show that the sort of abuses that ruined the Oklahoma bank would not be patched up by federal assistance. Bailing it out "would be sending the signal that anything goes,"</br></br>In the end, the bank, Penn Square, was shut down, only its insured depositors were fully paid off and the banking system survived without a crisis.</br></br>Nearly a decade later, however, the principle at stake that Independence Day has not been resolved: Are some banks "too big to failÛ without threatening the stability of the entire U.S. banking system?