One of the most notable features on the landscape of the banking crises of the 1980s was the crisis involving Continental Illinois National Bank and Trust Company (CINB) in May 1984, which was and still is the largest bank resolution in U.S. history. Although it took place before the banking crises of the decade gathered strength, the Continental episode is noteworthy because it focused attention on important banking policy issues of the period. Among the most significant of these was the effectiveness of supervision: in the wake of the bank’s difficulties, some members of Congress questioned whether bank regulators (in this case, the Office of the Comptroller of the Currency in particular) could ade- quately assess risk within an institution. The economic dislocation such a large bank failure might bring also engendered increased scrutiny of the supervisory process. In addition, Continental was a particularly telling example of the problem that bank regulators faced when attempting to deal with safety-and-soundness issues in an institution that had already been identified as taking excessive risks but whose performance had not yet been seriously compromised.

Continental’s size alone made it consequential. Large-bank failures in the 1980s and early 1990s would prove to have serious consequences for the Bank Insurance Fund (BIF). For example, although only 1 percent of failed institutions from 1986 to 1994 had more than $5 billion in assets, those banks made up 37 percent of the total assets of failed insti- tutions and accounted for 23 percent of BIF losses during that period. (1) Moreover, continuing industry consolidation can only serve to make the issues involved in the handling of large-bank failures more significant. (2)

(1) FDIC, Failed Bank Cost Analysis 1986–1994 (1995), 12, 32.

(2) At year-end 1984, only 24 commercial banks had more than $10 billion in assets; by year-end 1994, the number was 64. During the same ten-year period, total assets at such banks had risen from $865 billion to $1.94 trillion.

( . . . )

Conclusion

The crisis at Continental Illinois highlighted concerns about both large-bank supervision and large-bank failure and resolution. Given the regulators’ anxiety about Continen- tal’s correspondent banks and their worries about overall systemic risk, it was very unlikely they would have pursued a course different from the one taken in 1984. Regulatory options were further limited by Continental’s peculiar characteristics: although very large, it had proportionately few core deposits, no retail branches, and little franchise value. The Continental assistance package brought debate over TBTF to the fore, and although regulators would have preferred otherwise (a preference that did not mean regulators had a solution to

put in its place), TBTF essentially remained in place until addressed by law in 1991. 69 Nev- ertheless, after Continental there were some significant changes as the banking agencies ac- quired greater experience with large-bank failures. For example, regulators were given more flexibility, which allowed them to deal with large-bank failures more efficiently. The most important addition to the regulatory arsenal was the bridge-bank authority granted by Congress in 1987. 70 Moreover, without addressing TBTF directly, by the late 1980s regu- lators were no longer, in L. William Seidman’s words, “ as solicitous of the interests of the bank’s owners and bondholders” as they had been in the case of Continental. This changed policy had partly evolved by the time of the First City Bancorporation assistance in 1988, and was clearly evident in the case of First Republic, also in 1988, when FDIC money was channeled directly into the banking subsidiaries and not into the holding company. 71 By the early 1990s, many of the issues surrounding TBTF had been addressed under FDICIA, but the problem of systemic risk remains, as does the question of how regulators would respond today to a dilemma similar to the one they confronted in May 1984.

Time Line to Slavery is copyright 1998 by Forest Glen Durland. It may not be altered or sold, but may be copied intact for reasonable distribution.

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