Continental Illinois

Continental Illinois was a large Chicago-based commercial bank that became one of the most consequential institutions in the history of United States banking regulation. Its roots lay in two earlier Chicago banks: Commercial National Bank, founded during the American Civil War, and Continental National Bank, founded in 1883. Their 1910 combination created Continental & Commercial National Bank of Chicago, which began with approximately $175 million in deposits. The institution adopted the name Continental Illinois National Bank and Trust Company in 1932. For much of the twentieth century, Continental Illinois developed as a wholesale and corporate bank rather than primarily as a consumer branch network. It provided commercial lending, correspondent banking, trust services, corporate finance, investment banking-related services, and specialized credit to sectors such as energy. At its peak it ranked as the seventh-largest commercial bank in the United States by deposits and reported approximately $40 billion in assets. Its national profile was strengthened by its willingness to lend beyond the traditional geographic base of a Chicago bank. That growth strategy created significant vulnerabilities. During the energy boom of the late 1970s and early 1980s, Continental Illinois expanded its exposure to oil and gas producers, service companies, and investors connected with the Oklahoma and Texas energy markets. It also purchased a substantial volume of loans originated by Penn Square Bank of Oklahoma. When energy prices weakened and Penn Square failed, the quality of those loans deteriorated rapidly. The bank was accused of having performed inadequate due diligence on some of the acquired credits, while weaknesses in underwriting and oversight increased the scale of the losses. The resulting loss of confidence produced a severe deposit run in May 1984. Large depositors withdrew more than $10 billion in a short period, and regulators concluded that an uncontrolled failure could destabilize other banks and financial markets. The Federal Reserve and the Federal Deposit Insurance Corporation therefore arranged an extraordinary intervention. The FDIC guaranteed virtually all deposit accounts and protected bondholders, supplied billions of dollars of support, and removed the bank’s board and senior management. The rescue was widely described as the largest United States bank failure and bailout to that date. Congressional discussion of the intervention helped popularize “too big to fail” as a description of regulatory policy toward systemically important banks. After the rescue, the institution was renamed Continental Bank. The federal government effectively controlled approximately 80 percent of the company’s shares and gradually restructured the bank under new leadership. The government eventually exercised its right to acquire the remaining shares in 1989 and sold its holdings to private investors on June 6, 1991. Continental continued operating as a commercial bank, but its independence was temporary. In 1994, Bank of America acquired Continental Bank to expand its Midwestern presence. Continental’s former Chicago headquarters and portions of its operations subsequently became part of Bank of America’s regional organization. The later acquisition of LaSalle Bank in 2007 further expanded Bank of America’s Chicago franchise, but Continental Illinois itself no longer exists as an independent banking brand.

Continental Illinois emerged from the consolidation of two Chicago institutions. Commercial National Bank traced its origins to the Civil War era, while Continental National Bank was established in 1883. In 1910 they merged to form Continental & Commercial National Bank of Chicago, creating a substantial institution with about $175 million in deposits. The bank adopted the Continental Illinois National Bank and Trust Company name in 1932. The institution grew into one of the United States’ largest commercial banks. Its business concentrated on corporate and wholesale banking, including commercial credit, correspondent relationships, trust activities, and financing for specialized industries. Continental Illinois expanded its lending beyond Chicago and became particularly active in energy finance during the oil and gas boom of the late 1970s and early 1980s. This expansion increased both its national importance and its exposure to cyclical credit risk. A central problem was the bank’s purchase of loans originated by Penn Square Bank, an Oklahoma institution heavily involved in oil and gas lending. Many of the underlying borrowers were producers, service companies, and investors connected with the Oklahoma and Texas energy boom. When the energy market weakened and Penn Square failed, a large portion of the acquired loan book proved impaired. The failure exposed weaknesses in underwriting, monitoring, and due diligence. John Lytle, an executive associated with Continental’s Mid-Continent oil-lending division, later pleaded guilty to defrauding the bank and accepting kickbacks in connection with risky loan approvals. He received a federal prison sentence. By May 1984, doubts about Continental’s solvency caused a large deposit run. More than $10 billion was withdrawn by large depositors, placing pressure on the bank and on the broader financial system. The Federal Reserve and FDIC judged that Continental’s size and interconnectedness made an uncontrolled failure dangerous. They consequently guaranteed essentially all deposit accounts and protected bondholders, even though shareholders suffered substantial losses. The FDIC supplied approximately $4.5 billion in direct rescue funding, while the overall intervention was described in contemporary accounts as involving several billion dollars of new capital and emergency loans. The board and senior management were removed, and the bank was placed under new management. The rescue became a landmark in financial regulation. During a 1984 congressional hearing, Representative Stewart McKinney used the phrase “too big to fail” to characterize the government’s treatment of Continental Illinois. Although the expression had appeared occasionally before, the Continental case gave it lasting prominence as a description of the expectation that authorities would support a systemically important bank to prevent wider damage. After the intervention, the bank was renamed Continental Bank. The federal government effectively held about 80 percent of the company’s shares and retained rights over the remaining equity under the rescue arrangements. The government later acquired the remaining shares in 1989 and began returning the institution to private ownership. Its final government-held shares were sold on June 6, 1991. Continental Bank survived as an operating institution but did not remain independent. Bank of America acquired it in 1994 to strengthen its Midwestern business. Continental’s former South LaSalle Street headquarters in Chicago continued to be associated with Bank of America operations, while later transactions, including Bank of America’s 2007 purchase of LaSalle Bank, further reshaped the successor’s Chicago presence. Continental Illinois is therefore remembered both as a historic Chicago bank and as a defining example of the regulatory and moral-hazard issues surrounding government support for large financial institutions.

1. 1994Bank of America acquires Continental Bank

   The acquisition ends Continental’s independent corporate existence and transfers its successor operations into Bank of America.

   Source
2. 1991Government ownership ends

   The government disposes of its last Continental Bank shares on June 6, returning the bank to private ownership.

   Source
3. 1989The federal government acquires the remaining shares

   Under the rescue arrangements, the government exercises its rights over the remaining Continental Bank shares.

   Source
4. 1984Continental Illinois is rescued by federal regulators

   After energy-loan losses and a major deposit run, the FDIC and Federal Reserve intervene, replace management, and protect depositors and bondholders.

   Source
5. 1932The bank adopts the Continental Illinois name

   The institution is renamed Continental Illinois National Bank and Trust Company.

   Source
6. 1910Continental & Commercial National Bank of Chicago is formed

   Commercial National Bank and Continental National Bank merge, creating the institution that later becomes Continental Illinois.

   Source

A nationally significant Chicago wholesale bank emphasizing corporate, commercial, correspondent, and specialized-sector finance. Its reputation shifted from aggressive national growth to a prominent case study in bank-risk management, government rescue, and systemic importance.

• Commercial and corporate bankingCommercial banking

  Continental Illinois’s core business comprised lending and other financial services for companies, institutions, and large commercial customers. Its wholesale orientation helped the bank expand nationally and made it an important correspondent and corporate banking institution. The same growth strategy also concentrated substantial risk in cyclical industries and specialized credit markets.

• Energy-sector financeIndustry lending

  The bank financed oil and gas producers, service companies, and investors, particularly during the energy boom in Oklahoma and Texas. Energy lending became one of Continental’s most important specialized activities, but the subsequent downturn produced large losses and contributed materially to the 1984 insolvency.

• Town and Country MastercardCredit card

  Town and Country Mastercard was a credit-card program issued by Continental Illinois. In 1984, its assets and associated servicing operations were sold to Chemical Bank of New York. The servicing activities were subsequently moved and operated under the Chem Credit Services name.

• First Options ChicagoSecurities clearing

  First Options Chicago was an options-clearing operation acquired by Continental Illinois. It guaranteed settlement of customer trades, exposing the parent bank to substantial obligations when customers could not meet margin calls. The operation became a major subject of scrutiny after the 1987 market crash and required an emergency cash infusion from Continental.

• Continental Illinois Venture CorporationVenture capital

  Continental Illinois Venture Corporation was the bank’s investment subsidiary. It later helped form the semi-independent private-equity firm CIVC Partners with backing from Bank of America, linking a legacy Continental investment activity to a successor investment platform.

• 1994Bank of America acquisitionM&A

  After returning to private ownership, Continental Bank remained a significant Midwestern institution but was no longer independently viable as a national expansion platform.

  What changed. Bank of America acquired Continental Bank to broaden its Midwestern presence.

  Aftermath. Continental ceased to operate as an independent bank, while successor operations and facilities became part of Bank of America’s Chicago organization.

  Source
• 1984Regulators choose a full-scale rescue instead of liquidationStrategy

  A deposit run followed the deterioration of Continental’s energy-related loan portfolio and the failure of Penn Square Bank. Authorities feared that an uncontrolled failure by a bank of Continental’s size could spread instability through the financial system.

  What changed. The FDIC and Federal Reserve guaranteed deposits, protected bondholders, provided emergency financial support, and replaced the board and senior management. The bank was subsequently renamed Continental Bank.

  Aftermath. Shareholders were substantially diluted, the government became the effective majority owner, and the case became a defining example of “too big to fail” policy.

  FDIC rescue funding. $4.5 billion (1984)

  Source
• 1984Town and Country Mastercard assets are soldOther

  The credit-card business was part of the restructuring and asset disposition surrounding Continental Illinois’s financial distress.

  What changed. Assets associated with Town and Country Mastercard, together with remote servicing centers in Illinois, were sold to Chemical Bank of New York.

  Aftermath. The servicing operations were moved and reopened under the Chem Credit Services identity.

  Source

• 1988First Options Chicago clearing-risk inquiryControversy

  A congressional subcommittee investigated the risks created by First Options Chicago’s settlement guarantees after customers failed to meet margin obligations. The episode raised questions about the bank’s oversight of a highly leveraged financial-market operation and the potential for those risks to affect the wider banking system.

  Source
• 1984Energy-loan and Penn Square lending scandalControversy

  Continental Illinois suffered major losses after purchasing and holding poorly performing loans connected with Penn Square Bank and the Oklahoma and Texas energy boom. Investigations identified inadequate due diligence and improper conduct in parts of the bank’s oil-lending operation. Executive John Lytle later pleaded guilty to defrauding Continental and accepting kickbacks for approving risky loan applications.

  Source

• 1994Bank of America acquires Continental Bank

  Bank of America purchased Continental Bank as part of an effort to broaden its presence in the Midwestern United States.

  M&A
  Source
• 1991Federal government completes disposal of Continental Bank shares

  The government completed the return of Continental Bank to private ownership by selling its remaining shares on June 6, 1991.

  Other
  Source
• 1988Congressional hearings examine First Options Chicago risks

  A House Energy and Commerce subcommittee examined the risks created by First Options Chicago’s clearing and settlement activities and their potential implications for Continental Illinois and financial markets.

  RegulationOther
  Source
• 1984Continental Illinois becomes insolvent after energy-loan losses and a deposit run

  Losses linked partly to Penn Square Bank loans and weakening energy-sector credits triggered a major withdrawal of deposits and left Continental Illinois unable to continue without official support.

  BankruptcyRegulation
  Source
• 1984FDIC and Federal Reserve arrange an unprecedented rescue

  Regulators guaranteed the bank’s deposits, protected bondholders, supplied emergency support, and replaced the board and senior management rather than allowing an uncontrolled liquidation.

  RegulationBankruptcyLeadership change
  Source

1. Continental Illinois