Too-Big-To-Fail Doctrine

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In 1950 an amendment was added to the Federal Deposit Insurance Act of 1934 that would change the way the central bank act towards different types of banks. The doctrine says that a bank must be rescued when the "continued operation of such a bank is essential to provide adequate banking service in the community"(Samuelson and Krooss, 354). Because none of these terms were ever strictly defined the central bank has been given the ability to interpret the sentence and act on it is seen fit. That sentence has come to be understood as the central bank should and must bail out large struggling banks with all the liquidity necessary to keep the whole banking system intact. The Federal Deposit Insurance Corporation or FDIC insures many depositors up to 100,000, but with that additive clause passed in 1950 the Central Bank now responsible for insuring much larger sums. On September 19, 1984, it was testified to congress that some banks were just "too big to fail." Those included in this protective shield were the 11 largest. The Wall Street Journal soon after identified the 11 as BankAmerica, Bankers Trust, Chase Manhattan, Chemical Bank, Citibank, Continental Illinois, First Chicago, J.P. Morgan, Manufacturers Hanover Trust, Security Pacific and Wells Fargo.