¹ It is conceivable that a small bank could be insolvent in a different sense, that of being unable to meet the demands on it for cash. This has not been a frequent problem to the supervisory authorities. A small bank with clearly positive net worth is usually able to borrow to meet liquidity needs.

² Actually, Section 13 (e) does not speak directly of minimizing cost, but of action that will “reduce the risk or avert a threatened loss to the Corporation.” This rather vague criterion seems to give the FDIC considerable discretionary authority; nevertheless, in the last 20 years, cost minimization has been the general interpretation of this criterion.

³ Cf. Sinkey, J. and Kurtz, R., “Bank Disclosure Policy, Adverse Publicity and Bank Deposit Flows,” Journal of Bank Research.(Autumn 1973).Google Scholar

⁴ Recent discussions have blurred this distinction as the Federal Reserve has tended to discuss the lender of last resort concept in terms of individual banks. A recent paper by Thomas Humphrey (Federal Reserve Bank of Richmond Economic Review, January 1975) demonstrates rather convincingly in the view of Henry Thornton and Walter Bagehot, “the lender of last resort's responsibility is to the entire financial system and not to specific institutions.” (p. 9).

⁵ The Federal Reserve refused to do so in the case of the American Bank and Trust of Orangeburg, S.C., citing legal impediments. It appears that the Federal Reserve now believes it has the legal power to lend to an illiquid (but solvent) nonmember bank. In the American Bank and Trust case, the FDIC provided the temporary liquidity needed until a merger could be arranged. The FDIC seems to have limited legal ability to play this role.

⁶ The Franklin case is a useful example. The end result was a very happy one from the public interest point of view. Governor Sheehan has said that we were lucky and that the process took too long His implication is that if he had sole responsibility, a better solution would have been found sooner. Others have pointed out the serious flaws in Governor Sheehan's analysis (Cf. Carter Golembe Associates Memorandum 1974–10, “Federal Banking Regulation Reform”). I disagree with his view of our “luck,” but it is true that the successful resolution of the problem required extraordinary effort and cooperation among different agencies. I would prefer not to rely on such continued cooperation any more than I would on luck.

⁷ It should be recognized that there are some who would argue that broadened discretionary authority for the FDIC in handling these cases would lead to an increase in the pressure on the FDIC to avoid a payoff. The more definite and binding the rules on the FDIC, the easier it is to resist such pressures.

⁸ This outflow is likely to be made up of a withdrawal of deposits by large uninsured depositors rather than our traditional image of a run on the bank by small depositors lining up to make withdrawals.

⁹ The proposed legislation on interstate acquisitions, by setting a $500 million cutoff size, makes explicit the view that large banks should be treated differently from small.

¹⁰ Obviously, this oversimplifies the whole issue of 100 percent insurance. The traditional view has been that uninsured depositors play an important role in disciplining excessively aggressive banks, and this market force would be lost with 100 percent insurance. Evidence is lacking on the effectiveness of this market discipline force, but it may be improving. In a recent paper, Federal Reserve Governor Robert Holland cites evidence that creditors of bank holding companies are becoming more conservative and more discriminating.