Continental Illinois - 7 Continental had problem loans...

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Demise of Continental Illinois Bank in 1984 (Nation’s 8 th Largest Bank) 1. Management wanted to grow the bank rapidly—targeted 22 percent annual loan growth rate. 2. Illinois branch banking laws limited branch banking—limited each bank to 3 in-state branches and no branching across state lines. 3. Therefore Continental lacked a broad base of depositors with which to fund the aggressive loan growth. Had to resort to Liability Management. 4. So bank implemented hyper-aggressive liability management—issued huge volume of negotiable CDs, including $13 billion issued to foreign entities. 5. Continental had very illiquid asset structure ..... loans/total assets = 79% 6. Only $4 billion of its total deposits of $30 billion were covered by FDIC.
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Unformatted text preview: 7. Continental had problem loans outstanding in several depressed sectors: a. energy sector b. ag sector c. LDCs—Mexico, Brazil, Venezuela, etc. 8. Rumors started to float that bank was in trouble. Huge run on bank by holders of negotiable CDs. $9 billion liquidation. Liquidity crisis for the bank. 9. Gov’t swooped in and closed the bank. Package to protect depositors included $5 billion loan from Fed, $5.5 billion from consortium of large U.S. banks, and $2 billion from U.S. govt. ContnenTal Illinois Bank Liabilites AsseTs Cash and Dep aT Fed $0.3 B DDO $3 B Loans $24 B SD $3 B ± Bills $1 B NEG CDs $24 B ± and Municipal Bonds $6 B ±oTal Liabilites $30 B ±oTal AsseTs $31.3 B CapiTal $1.3 B...
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