merican City Bank has been closed and declared insolvent by California authorities, who took control of the bank at the close of business Friday. It was believed to be the second largest banking failure in state history.

Harold D. Doyle, the state's acting superintendent of banks, said he took possession because "substantial loan and operating losses exhausted the bank's capital."

Unless another financial institution is found to take over American City, the state's 22nd-largest bank, the Federal Deposit Insurance Corp. will begin paying off holders of its $294 million in deposits late this week, FDIC spokesman Bill Olcheski said.

American City was founded in 1963 by real estate developer S. Jon Kreedman. Although small in comparison to the state's financial giants, it became one of the more successful banking ventures in southern California in recent years, aggressively making construction loans and pursuing legal clients.

But its financial statement for Dec. 31 showed that of $204.5 million in loans, payments on 37 percent were past due.

The largest bank to fail in California was United States National Bank, which was closed down by federal officials in October, 1973. San Deigo-based U.S. National, part of the empire of financier C. Arnholt Smith, had 62 branches and assets of about $1 billion.