The rescue that gave the world the phrase "too big to fail" - seven years before BCCI was closed instead of rescued.
Continental Illinois National Bank and Trust Company was, in the early 1980s, one of the ten largest banks in the United States and the largest in Chicago. Its troubles began indirectly: Continental had bought large volumes of energy-sector loan participations from Penn Square Bank, a much smaller Oklahoma bank that failed in 1982 after its own aggressive oil-and-gas lending went bad. When Penn Square collapsed, Continental was left holding a huge share of the bad loans, and its own financial position began to deteriorate rapidly.
By May 1984, rumours about the bank's health triggered a large-scale run - not from small depositors, who were protected by deposit insurance, but from large institutional lenders and foreign depositors moving money out virtually overnight. At the time of the run, insured deposits made up only around 15% of Continental's total liabilities, meaning a huge majority of its funding could flee the bank with no protection at all standing in its way.
How US regulators responded
After urgent internal debate about the available options, the FDIC, the Federal Reserve, and the Comptroller of the Currency put together an extraordinary rescue package. It included:
- A US$2 billion loan from the FDIC to shore up the bank's liquidity.
- A guarantee, extended by the FDIC, covering all of Continental's creditors and depositors - not just those protected under normal deposit insurance limits.
- Direct capital support that, in the permanent rescue plan finalised later that year, saw the FDIC take an equity stake of up to roughly 80% of the bank, effectively taking public ownership of a private commercial bank in exchange for absorbing its bad loans.
- A change of management as part of the assistance package.
Continental was not closed, liquidated, or wound down. It continued operating as a functioning bank throughout, under a new ownership and governance structure, while the FDIC worked through the bad assets it had taken on over the following years. It was eventually returned fully to private ownership.
Why it matters: the birth of "too big to fail"
Congressman Stewart McKinney gave the episode its lasting name in 1984, describing the rescue as confirmation that some banks were simply "too big to fail." The Continental Illinois case became the textbook example, cited in banking policy discussions for decades afterward, of regulators explicitly choosing to preserve a systemically significant bank rather than allow market forces to close it.
The Relevance to BCCI
Continental Illinois matters to the BCCI story because of when it happened: 1984, a full seven years before BCCI's closure. By the time regulators were considering what to do about BCCI's problems in 1990 - 91, the rescue playbook wasn't theoretical or untested - it had already been used, publicly, successfully, and was widely known throughout the banking and regulatory world as the way a major bank in serious trouble should be handled.
The specific tools used for Continental - emergency liquidity, a blanket creditor guarantee, an equity stake in exchange for absorbing bad debt, management change, continued operation throughout - map almost point for point onto what BCCI's own Abu Dhabi-backed restructuring programme was trying to achieve in 1990 - 91: fresh capital, new management, separation of impaired assets, and continued operation under a reorganised structure.
The difference is that Continental Illinois's rescuers were the very regulators overseeing it, acting to preserve the bank. BCCI's shareholders were already funding a comparable rescue themselves - and were told, instead, that the bank would be closed.
