Continental Illinois
| Company type | Public (before bailout and acquisition) |
|---|---|
| Industry | Banking, Financial services |
| Founded | 1910 |
| Defunct | 1994 |
| Fate | Acquired by Bank of America |
| Headquarters | Chicago , United States |
| Products | Commercial banking, Trust services, Credit cards (Town and Country Mastercard portfolio) |
The Continental Illinois National Bank and Trust Company was a U.S.-based bank established in 1910, which grew to become the seventh-largest commercial bank nationwide by deposit volume, managing approximately $40 billion in assets.
In 1984, it suffered the most significant bank collapse in American history up to that point, caused by a bank run linked to problematic loans from oil sector financing connected to the energy surge of the late 1970s. Regulators classified it as "too big to fail" and intervened with a bailout under new leadership. Eventually, Continental Illinois was acquired, with its assets absorbed into Bank of America.
The largest bank failure record set by Continental Illinois was later surpassed by the collapse of Washington Mutual amid the 2008 financial crisis.
Early history
Continental Illinois was formed through the merger of two Chicago banks: Commercial National Bank, founded during the American Civil War, and Continental National Bank, which began operations in 1883.
These two institutions combined in 1910 to create Continental & Commercial National Bank of Chicago, boasting deposits of $175 million—a considerable amount at that time. The institution adopted the name Continental Illinois National Bank & Trust Co. in 1932.
Insolvency
In May 1984, Continental Illinois faced insolvency, largely due to risky loans it had acquired from the failed Penn Square Bank N.A. of Oklahoma, which had financed oil and gas ventures during the late 1970s and early 1980s energy boom. John Lytle, an executive in the Mid-Continent Division, failed to perform adequate due diligence, resulting in approval of hazardous loans. Lytle later pleaded guilty to defrauding Continental of $2.25 million and accepting $585,000 in kickbacks, receiving a prison term of three and a half years.
The collapse of Penn Square triggered a depositor run on Continental Illinois, causing withdrawals exceeding $10 billion in early May 1984. The bank’s fragility was further aggravated by significant losses from its recent acquisition of First Options Chicago (FOC), a major clearinghouse firm. During the October 1987 market crash, numerous FOC clients defaulted on margin calls, compelling FOC—and thus Continental—to cover these settlements, exposing the bank to considerable risk. Nassim Nicholas Taleb criticized FOC’s approach to risk management for failing to account for netted exposures.
To support its $135 million stake in FOC, Continental Illinois had to inject $625 million in emergency capital. The crisis involving FOC and its potential impact on Continental Illinois and broader financial markets led to a 1988 congressional hearing held by the House Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations, chaired by Representative John Dingell.
FDIC rescue
Because of Continental Illinois' immense scale, regulators declined to permit its failure. The Federal Reserve and Federal Deposit Insurance Corporation (FDIC) were concerned that its downfall could incite extensive financial turmoil. To avert this, they safeguarded nearly all depositors' accounts as well as bondholders. The FDIC contributed $4.5 billion to stabilize the institution. As noted by Daniel Yergin in The Prize: The Epic Quest for Oil, Money, and Power (1991), the federal government orchestrated a significant bailout package, including $5.5 billion in fresh capital, $8 billion in emergency loans, and the appointment of new leadership. Chairman David Taylor spearheaded the bailout discussions despite not being directly implicated in the loan crisis. After two months without securing a merger partner, both the board and senior executives were dismissed; Taylor was reassigned as vice-chairman. While shareholders lost most of their equity, bondholders of the holding company were shielded. This intervention under Ronald Reagan remained the largest bank failure bailout in U.S. history until the 2008 seizure of Washington Mutual.
The term "too big to fail" gained prominence when Congressman Stewart McKinney used it during a 1984 Congressional hearing addressing the FDIC’s role in rescuing Continental Illinois, although it had sporadically appeared in media reports beforehand.
Return to private ownership
Following restructuring, Continental Illinois was renamed Continental Bank. Initially, the federal government held an 80% stake with an option to purchase the remaining shares, which it exercised by 1989. Over time, the government divested its holdings and fully privatized Continental Bank by June 6, 1991.
In 1994, BankAmerica acquired Continental Bank to strengthen its Midwestern market presence. Its successor entity, Bank of America, continues to operate a retail branch and numerous back-office staff at Continental’s former headquarters on South LaSalle Street in Chicago. Bank of America expanded its Chicago-area retail network further by acquiring LaSalle Bank in 2007, thereby enhancing both its consumer banking footprint and corporate and investment banking capabilities.
In 1984, Continental Illinois divested its Town and Country Mastercard portfolio to Chemical Bank of New York, which included credit card processing centers located in Illinois. These facilities were subsequently relocated and rebranded as Chem Credit Services within that same year.
Continental Illinois Venture Corporation, the bank’s investment arm, founded a semi-autonomous private equity firm known as CIVC Partners, which later received backing from Bank of America.
Silver dollar reserves
As part of its mandated reserves, the bank held around 1.5 million silver dollars. These coins were sold to a numismatic dealer during the early 1980s to take advantage of escalating silver market prices.