What is Continental Illinois?
Continental Illinois was at one time the largest bank in Chicago. As a result of a merger in 1910, the bank aggressively pursued commercial and industrial loans.
In 1981, the energy market experienced a significant downturn, and Penn Square Bank became insolvent. Continental held approximately $1billion of Penn Square-linked loans, which led to considerable losses.
Continental’s economic model, which relied on borrowing short-term money from the Federal Reserve and selling certificates of deposit, exacerbated the problem (CDs). Continental turned to the high-rate lending environment in international (e.g., Japanese) money markets when these funding sources proved insufficient to fulfil its rising liquidity demands.
Why is Continental Illinois important?
The failure of Continental Illinois National Bank and Trust Company in 1984, the largest in U.S. history at the time, and its subsequent rescue gave rise to the term “too big to fail.”
The “too big to fail” dilemma may encourage people to take more risks. Institutions that expect government assistance may take more risks because they and their creditors are unlikely to bear the entire cost of losses. Furthermore, huge enterprises are more likely to receive lower-cost financing since investors are less concerned about risk. Following Continental Illinois, investors believed that significant bank debtors would be safeguarded.