AS A PRACTICAL MATTER, failing banks leave government regulators with very few acceptable alternatives. If a bailout costs the insurance fund less than letting the bank go bust and paying off the insured depositors, then a bailout is self-evidently the right thing to do. The rescue of the First City Bancorp of Texas was a model of good sense and an example of the guidelines that the Federal Deposit Insurance Corp. has worked out through a series of difficult cases.
The FDIC has imposed all the right penalties for failure. The stockholders of First City have been all but wiped out. The unsuccessful management has been removed. The long-term creditors are not going to be protected. But for the customers of the bank, business will proceed without a ripple. A bailout averts the enormous disruption and the costs to innocent victims of a large banking operation's collapse. The uninsured depositors are not threatened with losses, nor will borrowers suddenly be cut off from their accustomed sources of credit.
The first bank bailout, in 1971, involved a small bank in Boston. Because it was owned by blacks and most of its depositors were black, the FDIC was reluctant to let it go under in the usual way. The regulators, with the recent ghetto rioting much in their minds, feared the reaction. But since then the FDIC has used bailouts to avert other kinds of destructive impacts of bank failure. In the case of the Continental Illinois Corp. of Chicago in 1984 -- by far the largest of the bank bailouts -- many smaller banks had deposited funds there and, had it been allowed to collapse in the classic fashion, it would have started a chain reaction of bank failures.
Similarly, First City Bancorp is a holding company with 61 banks throughout Texas, and if it had been shut down, the effects would have been especially damaging in a state that has been going through a severe recession. The bailout may cost the FDIC as much as $900 million, but the money comes from insurance premiums paid by banks for that purpose, and expensive though this solution may prove to be, shutting the bank down would have cost far more. The terms of the bailout punish the owners and managers, but protect the customers and the economy that these banks serve. That's good public policy.