2. - History of Continental Illinois
- Growth of Bank
- Comparison between CI and Peers
- Reasons of Bankruptcy
- Bailouts
- Conclusion (Too Big To Fail)
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3. Continental was the product of a 1910 merger of two
Chicago enterprises, the Commercial National Bank and the
Continental National Bank.
1910
Source: Chicago History Street View
http://chicagopc.info/banks.htm
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4. September 8, 1929
September 8, 1929
“It will be the largest
“It will be the largest
bank in the world to be
bank in the world to be
housed under one roof.”
housed under one roof.”
Second largest bank in
Second largest bank in
the country to National
the country to National
City in New York.
City in New York.
Culmination of a series
Culmination of a series
of Chicago bank
of Chicago bank
mergers spanning 71
mergers spanning 71
years.
years.
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5. Continental Illinois Bank Building
Office of Chairman
Source: http://chicagopc.info/
Continental Illinois 5
9. May 29, 1981
May 29, 1981
Chairman of Continental-Illinois Roger A.
Chairman of Continental-Illinois Roger A.
Anderson became highest paid banker in the
Anderson became highest paid banker in the
United States, pulling in a whopping $710,440
United States, pulling in a whopping $710,440
($1.6 million in 2009).
($1.6 million in 2009).
President John Perkins was also on the list with
President John Perkins was also on the list with
just under $600,000 salary.
just under $600,000 salary.
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10. Continental has doubled in price rising from about $13 to
$27 since the end of 1974 compared with a 10% gain for
the average money-center bank.
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11. Continental vs. Peers
• Much higher reliance on “purchased funds” (> 70%)
• Higher yield on C&I loans (+ 1%)
• Higher growth of C&I loans (1.5X)
• Lower non-performing loan (1974-78 -.2%)
• Huge growth in energy loans (26% of C&I in 1979 vs.
47% in 1981).
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12. - Only contcentrating on energy sector loans,
- Loans given to the less developed Latin American Countries,
- Arguments of some of theoreticians and analysts,
- Giving good ratings by audit firms,
- Due diligence was not properly conducted by John Lytle
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14. In the same period, Penn
Square Bank couldn’t receive
the loans by the weak energy
sector, it bankrupted so that
Continental Illinois came to its
senses.
Continental Illinois lost more
than any other bank, having
participated in careless oil and
gas loans.
It had to declare that $1.3
billion non-performing assets in
the second quarter of 1982.
Source: http://www.fdic.gov/bank/analytical/firstfifty/chapter5.html
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15. Continental’s response to this plan: “This will be the end of
Continental’s response to this plan: “This will be the end of
the bank, and you will be to blame.”
the bank, and you will be to blame.”
03/02/13 Continental Illinois 15
16. After the collapse of Penn Square Bank, Mexico announced
that it could not pay the debts to Continental Illinois, so it
triggered a crisis.
Analysts changed their mind and they started to say that
Continental Illinois had much risk in its credit portfolio and
they gamble.
After these developments, investors thought that
Continental Illinois would be in bankrupt in the long term, so
they began to withdraw their deposits, (Electronic Bank
Run).
This also created liquidity crisis.
.
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17. Continental Illinois tried not to lose its deposits which are in
its hand and it was willing to pay high interest rates and to
meet the needs of liquidity borrowing at high interest rates
from foreign markets. But it created crucial risks such as
interest and exchange rate.
03/02/13 Continental Illinois 17
20. Discount Window
$3.6 billion – May 11, 1984
- Continental had to borrow $3.6 billion at the Federal
Reserve discount window to make up for its lost
deposits.
- This was not enough to stop the run on Continental
Illinois or make it solvent
- Traditionally a short-term device so that banks can meet
capital reserve requirements
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21. Bank Lending Group
– $4.5 billion loan package provided by 16 banks
– Again, Insufficient to stop the run
– During this time, the bank’s domestic correspondent
banks started withdrawing funds.
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22. Federal Assistance Package
On 17th of May, 1984
• FDIC provided $2 billion
• Fed Stated it would meet any liquidity needs of
Continental Illinois
• Group of 24 Major US Banks agreed to $5.3 in
unsecured funding
• FDIC promised to guarantee all creditors and
depositors, even those above the $100,000 limit
(TBTF)
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23. Finding a Merging Partner
• During this Federal Assistance Period, the Federal
Reserve’s goal was to find someone to merge with
Continental Illinois
• Fed searched for 2 months but could not find a suitable
partner
• The economy was not entirely healthy making it harder
to find a merging partner
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24. Government Ownership
• After the failed research for a merging partner, the
government purchased $4.5 billion of bad loans from
Continental Illinois
• The government received non-voting preferred stock that
could be converted to common stock which amounted to
a 79.9% ownership stake
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25. Bank of America Bought
Continental Illinois for $1.9 bn
• Government began selling stake in 1986,
divesting one-third of shares
• Completed divestment in 1991
• $939 Million in Cash August 31, 1994
• 21.25 Million Shares of Stock
• $37.50/share
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27. The Continental was resolved in this way in part
because the regulators believed that, because of its
large size and broad interconnections with other banks,
failing the bank would have had serious adverse effects
on other banks, financial markets, and the
macroeconomy (Committee, 1984; FDIC, 1998b; and
Sprague, 1986).
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28. On November 4, 2011, the
Financial Stability Board
released a list of 29 banks
worldwide that they
considered to be "too big to
fail". Of the list, 17 banks
are based in Europe, 8 in
the U.S., and the other four
in Asia:
• Bank of America • Dexia • Nordea
• Bank of China • Goldman Sachs • Royal Bank of Scotland
• Bank of New York Mellon • Group Crédit Agricole • Santander
• Banque Populaire CdE • HSBC • Société Générale
• Barclays • ING Bank • State Street
• BNP Paribas • JP Morgan Chase • Sumitomo Mitsui FG
• Citigroup • Lloyds Banking Group • UBS
• Commerzbank • Mitsubishi UFJ FG • Unicredit Group
• Credit Suisse • Mizuho FG • Wells Fargo
• Deutsche Bank • Morgan Stanley
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29. - Continental experienced a high-speed electronic bank run
- For the first time, the FDIC spent more on resolving failures
than it receives in premiums
- 79 FDIC-insured banks with $3 billion in assets failed.
- The banking regulators individually published new uniform
capital standards.
- In response to a 1983 law, banking regulatory agencies set
minimum capital requirement standards for individual
institutions.
- Until the seizure of Washington Mutual in 2008, the bailout
of Continental Illinois was the largest bank failure in
American history.
03/02/13 Continental Illinois 29
30. - WILSON, Mark R. (2004-2005). "Continental Illinois National Bank & Trust Co.". In Stephen R. Porter
and Janice L. Reiff. (Electronic) Encyclopedia of Chicago. Chicago Historical Society / Newberry
Library, University of Chicago Press. ISBN 0226310159. Retrieved 2009-10-28.
- Continental Illinois Sails into a Calm, Business Week (May 14, 1979): 114.
- Here Comes Continental, Dun’s Review 112, no. 6 (1978): 42-44; and Banker of the Year, Euromoney
(October 1981): 134.
- Bailout: An Insiders Account of Bank Failures and Rescues (1986), pt. 4; James P. McCollum, The
Continental Affair: The Rise and Fall of the Continental Illinois Bank (1987); and William Greider,
Secrets of the Temple: How the Federal Reserve Runs the Country (1987), chaps. 14 and 17.
- "Policy Measures to Address Systemically Important Financial Institutions". Financial Stability
Board. 2011-11-04. Retrieved 2011-11-04, P.4
- KAUFMAN, George, G., “Too big to fail in U.S. Banking: Quo Vadis?”, Loyola University Chicago
and Federal Reserve Bank of Chicago, Revised Draft, January 10, 2003
- Federal Deposit Insurance Corporation (FDIC), www.fdic.gov
- Smart Money Bank: What Went Wrong, The New York Times (May 18, 1984), sec. 4, p. 15.
- PHILIP L. Zweig, Belly Up: The Collapse of the Penn Square Bank (1985).
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Good Morning Dear Friends, Today, I would like to tell you something about Continental Illinois National Bank and Trust Company.
As you see from the outline, Firstly, I will give some historical information. Then I will tell something about growth of Continental Illinois. After that you will see a brief comparison between Continental Illinois and Peers. Furthermore I will talk about the reasons of the bankruptcy. Then we will learn what is done to save the continental illinois and as a result i will finish my presentation with a term «too big to fail».
Continental Illinois can be traced back to two Chicago banks, one of them was the Commercial National Bank, founded by Henry Eames during the American Civil War , It had become one of the city's leading banks by the early 1870s. The other bank was the Continental National Bank, founded by John C. Blac k in 1883 In 1910, the merger of Commercial and Continental created a new entity, the Continental & Commercial National Bank of Chicago, which had $175 million in deposits, making it one of the largest banks in the United States .
In 1929 , It merged with Illinois Merchants Trust Co
T hree years later, in 1932, the bank's name became Continental Illinois National Bank & Trust Co.
During the Great Depression, the bank required a $50 million loan from Reconstruction Finance Corp oration which was a federal government agency to stay afloat. After World War II, the bank grew: by the beginning of the 1960s Continental had over $3 billion in deposits and employed 5,000 people. By the early 1970s, when it had 77 branches and affiliates around the world, the bank employed about 8,200 Chicago-area residents,
in the mid-1970s its management began to implement a growth strategy focused on commercial lending, explicitly setting out to become one of the largest commercial lenders in the U.S . By 1981, management accomplished this and more: Continental was the largest commercial and industrial (C&I) lender in the United States. Between 1976 and 1981, C&I lending jumped from approximately $5 billion to more than $14 billion (180 percent), while its total assets grew from $21.5 billion to $45 billion (110 percent).
Now you see some of the titles from that time According to the earnings report, CI earnings higher
Everything was going well
Continental’s management, the bank’s aggressive growth strategy, and its returns were lauded both by the market and by industry analysts. A 1978 article in Dun ’ s Review pronounced the bank one of the top five companies in the nation; an analyst at First Boston Corp. praised Continental, noting that it had “ superior management at the top, and its management is very deep ” ; in 1981, a Salomon Brothers analyst said that Continental was one of the finest money-center banks going. Continental has doubled in price rising from about $13 to $27 since the end of 1974 compared with a 10% gain for the average money-center bank. It lasted till 1981
1.5 times of peers
Concentrating on energy sector loans which constitute an important place in its portfolio Loans given to the less developed Latin American Countries which are in question with credit return in the middle of 1982 Theoreticians and analysts argument that the deterioration of credit quality reduces only the profitability; Audit firms gave good ratings to Continental Illinois and it created the biggest nightmare for the crisis management . «Slurring over the foreseen crises» Due diligence was not properly conducted by John Lytle who was a former vice president of the Continental Illinois There is one important thing to say at this point As everybody know that if a bank uses the ir financial resources or the deposits which is pooled from investors for only consumer lending, t he risk of bank increases . Continental Illinois had the same risk as well . Continental Illinois concentrated in the energy sector . Penn Square Bank which had $ 436 million in assets and made its name in high-risk energy loans during the late 1970s and early 1980s, because of the guarantees which were given to Continental Illinois , it would have led to large losses of Continental Illinois
E ven as its share price was deteriorating during late 1981 and early 1982, many stock analysts continued to recommend purchase of Continental shares.
Continental’s condition was getting worse. Somebody could have something done to prevent the fail of Continental. The bank c ould not stand this situation more, in mid-1983, it had to deal with The Office of the Comptroller of the Currency. This agreement included asset - liability management, development, credit and fund management The agreement applied in 1983, however, because of increase the interest rate and default on the loans given to the Latin American Countries, Continental Illinois had to declare their non-performing assets as $2.3 billion in the first quarter of 1984.
I will categorize the bailouts in 5 titles
Discount window is the opportunity given to banks to borrow funds from the central bank following unexpected changes in their accounts . OCC provided $ 3.6 billion loan from FED, but bank run was going on and other banks lost their trust on Continental Illinois.
OCC, FDIC and FED (regulators) made a decision about Continental Illinois. They said that Continental Illinois was too big to fail.
Government began selling stake in 1986, divesting one-third of shares The divestment was completed in 1991 In 1994, a diminished Continental was acquired by Bank of Americ a with $ 939 Million in Cash, 21.25 Million Shares of Stock and $ 37.50/share
In the last part, I would like to conclude with description of a term. The term of Too big to fail is actually a theory. According to this theory, certain financial institutions are so large and so interconnected that their failure will be disastrous to economy. Proponents of this theory believe that these institutions should become recipients of beneficial financial and economic policies from governments or central banks to keep them alive
