International Business School
Continental Illinois Bank Failure
The failure of Continental Illinois National Bank and Trust Company (CINB) One of the most famous features on the landscape of the banking crisis in 1980s was the crisis involving the Continental Illinois National Bank and Trust Company in May 1984, which still is one of the largest bank failures in U.S. banking history. The collapse of CINB was a significant event in banking history that had a moral for both bank risk managers and regulators. It showed how quickly the exposure of credit problems at a well regarded bank could turn into a liquidity problem that danger not only the survival of the bank but also the financial system in the US. Economic and financial environment at the time of the failure
CINB was born from a merger of two banks located in Chicago, the Commercial National Bank and the Continental National Bank. In 1910 when these two banks merged they had $175 million in deposits, a large amount at that time. In 1984, it was the 6th largest bank in the U.S., with nearly $40 billion in assets. In the mid 1980s, the US financial system faced harsh problems. For example, three major organizations, Lockheed Corporation, Chrysler Corporation, and New York City required government aid, bailout, to avoid financial crisis. This economic disorder led to troubles in financial organizations. Between 1984 and 1985 there were nearly 200 bank failures. This extraordinary number of collapsing banks raised complicated questions for bank supervisors and other public policy bodies. During the 1980s the American business society began to see itself as failing to keep speed with developments elsewhere such as in Japan. Japanese economy moved ahead of the American economy in some parts. The failure of CINB began when Japanese traders decided not to roll-over their inter-bank placements with Continental.”That was the main problem for Dave Kennedy when he decided the Continental would have to become a great international bank in order to remain a great American bank. There weren’t any international banking people” (James P. McCollom, 1987). Another issue that was raised in the 1980s was the bad situation of the savings and loan industry leading to the failure of many savings and loan organizations. This was also a period in which corporate thieves developed new ways of taking over companies, issued inflated stocks and developed other schemes that would lead to a crackdown, and challenged the capability of the U.S. economy in many ways. Many banks failed in the 1980s because interest rates in the economies were low while their economies grew. Deregulation at the same time detached many of the policies that had up to then limited rivalry within the bank industry. The outcome was a huge credit-driven boom in assets and share prices that encouraged bankers to increase business activities, but when interest rates increased sharply in 1989, borrowers started to not pay back their loans in large numbers, and banks in different countries were submerged in debts. In February 1988 the interest rate was 9% and it increased to 15% by October 1989. Although the collapse of the Continental Illinois Bank took place before the financial crisis strengthened, the Continental incident is noteworthy because it focuses on the important banking policy issues of that financial crisis period in the US history. Causes of the failure and errors by the Bank
In 1984, with over $40 billion in assets, Continental Illinois National Bank was the 6th largest commercial bank in the United States and by far the most important bank operating in the Midwest. During the 1970s and early 1980s, Continental was one of the fastest growing and most profitable large banks. From 1975 to 1981, Continental’s commercial and industrial loans grew at an annual rate of 22%, greatly outpacing the loan growth of other financial institutions. By 1981, Continental became the biggest loan lender in the country...
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