Views on the Federal Rescue of the Continental Illinois National Bank and Trust Co.

GAO discussed the federal financial rescue of the Continental Illinois Bank and Trust Company, focusing on: (1) comparing the rescue of Continental Illinois to federal financial rescues of other large municipalities and firms; and (2) the implications of the rescue for the future of bank regulation. GAO stated that the rescue of Continental Illinois conformed with GAO guidelines for financial assistance to large corporations, but conformance with the guidelines was hampered by the nature of the bank regulatory system because: (1) congressional involvement in the rescue of financial institutions is impractical; and (2) the decision to keep Continental Illinois open severely limited the government's available options. GAO also stated that two classes of financial institutions have evolved under the current regulatory system; those institutions whose failure would affect the stability of the banking system, and those whose failure would not severely affect the system. GAO proposed four possible avenues of regulatory reform that could alleviate the differences, including: (1) changes to the current system of deposit insurance; (2) stronger bank examination and supervision; (3) increased disclosure requirements for financial institutions; and (4) changes to ensure that banks are adequately capitalized.