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If a Mega Bank Fails, Who Pays?

In the wake of big bank mergers, some wonder if safety net for deposits will hold.

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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.

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