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Bank regulators also feared that if overseas depositors lost money in a Continental failure, they might start pulling their accounts from other big U.S. banks as well. Smaller institutions could face failure if they lost large amounts of money on deposit with Continental. The shock waves might extend to local companies doing business with those banks. In short, what was at stake in Continental's crisis was the stability of the entire international banking system. Said Democratic Senator William Proxmire of Wisconsin, a vocal opponent of the Chrysler and Lock heed rescues: "For the first time I favor a bailout. In this case it was absolutely essential."
One ominous implication of the Continental bailout is that nationalization might become a common way to salvage large banks that run into trouble. FDIC Chief Isaac, a lawyer who favors deregulation of banks, argues that the rescue is a long way from nationalization. He contends that his agency will not be come involved in the day-to-day running of Continental. If the Chrysler case is any precedent, however, the Government can easily be tempted to involve itself in a company's affairs. While federal watch dogs were scrutinizing Chrysler, Washington bureaucrats were even deciding whether the company could keep its corporate planes.
Isaac was quick to point out that "not one nickel of taxpayers' money" will be spent on Continental because the rescue funds will come from FDIC reserves, which are made up of earnings collected on insurance premiums from banks. Yet the chairman of the House Banking Committee, Rhode Island Democrat Fernand St Germain, objects to any Government agency committing itself to such an expensive bailout without getting congressional approval. Said St Germain: "If there are enough Continentals, then we can rest assured that Mr. Isaac will be standing here, hat in hand, asking for congressional appropriations to replenish the funds."
Other critics believe the Continental rescue proves that the FDIC has a big-bank bias. Said Democratic Senator David Boren of Oklahoma: "The result of FDIC policy seems to encourage concentration of banking in a few large institutions and requires discipline only of small banks. Oklahomans are justifiably bitter about this double standard, especially when the collapse of Penn Square Bank doubled the state's bankruptcy rate."
The Continental situation has unquestionably dealt a setback to the movement for less banking regulation. Banks, which were tightly controlled for nearly half a century after the financial crisis of the Depression, have been wandering almost freely across state lines and into such new businesses as insurance, stock brokerage and other financial services. Politicians and regulators are likely to be more cautious about allowing banks to enter different fields. In fact, some reregulation of banks may result. St Germain plans to hold hearings in September on the Continental bailout, which he believes shows why banks should be forbidden to expand too far afield.