Continental illinois case study berat başat

Berat BAŞAT

03/02/13 1

03/02/13 Continental Illinois 2

- History of Continental Illinois

- Growth of Bank

- Comparison between CI and Peers

- Reasons of Bankruptcy

- Bailouts

- Conclusion (Too Big To Fail)


Continental was the product of a 1910 merger of two Chicago enterprises, the Commercial National Bank and the Continental National Bank.

Street ViewSource: Chicago History http://chicagopc.info/banks.htm

1910

http://chicagopc.info/banks.htm

http://chicagopc.info/banks.htm


September 8, 1929

“It will be the largest bank in the world to be housed under one roof.”

Second largest bank in the country to National City in New York.

Culmination of a series of Chicago bank mergers spanning 71 years.

September 8, 1929

“It will be the largest bank in the world to be housed under one roof.”

Second largest bank in the country to National City in New York.

Culmination of a series of Chicago bank mergers spanning 71 years.

Continental Illinois 5

Source: http://chicagopc.info/

Continental Illinois Bank Building

Office of Chairman


After World War II


Source: Federal Deposit Insurance Corporation (FDIC)

1976 - 19811976 - 198103/02/13 Continental Illinois 8

May 29, 1981

Chairman of Continental-Illinois Roger A. Anderson became highest paid banker in the United States, pulling in a whopping $710,440 ($1.6 million in 2009).

President John Perkins was also on the list with just under $600,000 salary.

May 29, 1981

Chairman of Continental-Illinois Roger A. Anderson became highest paid banker in the United States, pulling in a whopping $710,440 ($1.6 million in 2009).

President John Perkins was also on the list with just under $600,000 salary.



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.

Continental vs. PeersContinental 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).

• 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).



- 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


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

Continental’s response to this plan: “This will be the end of the bank, and you will be to blame.”

Continental’s response to this plan: “This will be the end of the bank, and you will be to blame.”



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.

.


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.

1982 - 19841982 - 198403/02/13 Continental Illinois 18

Bailing Out Continental IllinoisBailing Out Continental Illinois


Discount WindowDiscount 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


Bank Lending GroupBank 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.


Federal Assistance PackageFederal Assistance Package

• 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)


On 17th of May, 1984

Finding a Merging PartnerFinding 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


Government OwnershipGovernment 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


Bank of America Bought Continental Illinois for $1.9 bn

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

• 21.25 Million Shares of Stock

• $37.50/share03/02/13 Continental Illinois 25

August 31, 1994


Source: www.notetoanon.com


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).


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• Bank of China• Bank of New York Mellon• Banque Populaire CdE• Barclays• BNP Paribas• Citigroup• Commerzbank• Credit Suisse• Deutsche Bank

• Dexia• Goldman Sachs• Group Crédit Agricole• HSBC• ING Bank• JP Morgan Chase• Lloyds Banking Group• Mitsubishi UFJ FG• Mizuho FG• Morgan Stanley

• Nordea• Royal Bank of Scotland• Santander• Société Générale• State Street• Sumitomo Mitsui FG• UBS• Unicredit Group• Wells Fargo


- 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.


- 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).

http://www.fdic.gov/

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