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Word Count: 677
The article Continental Illinois The Making of a Liquidity Crisis demonstrates the inconsistencies of the current regulatory policy in effect by the federal Reserve System which in turn has hurt banks like Continental Illinois National Bank and Trust Co who had problems with bad loans that they produced in the early 80s which lowered earning drastically and decreased the market value of bank equity undermined customer confidence and brought about net deposits outflows By the end of 1984 Continentals deposits had shrunk by almost 12 billion and the bank had been effectively nationalized The problem started in the early 70s when managements pursuit of growth through aggressive lending The chairman of Continental Roger Anderson believed that Continental was one of the top three domestic lender in the US Its loans where growing at an extremely fast average rate of 198 while peer banks where only growing at 147 However the reported profits where disguising serious earnings and liquidity problems in funding and loan growth Its net reliance on hot money was almost double that of comparable banks which was indicated by the liquidity measure net of these volatile liabilities Due to the aggressive lending in the volatile economic environment poor quality of loans where lent out The Continental had heavy loan exposure to problem companies like Braniff International Harvester Nucorp Energy and Wickes Lending in this area coincided nicely with the oil booms rising prices and profitable-looking borrowers which included major oil companies wildcat drillers and old field servicing operators Continental had serious problems when the oil prices fell By 1981 Continental had purchased more than 600 million in loan participants from Penn Square Bank When Penn Square failed in July 1982 Continental held more than 1 billion in loans which was originated by Penn Square he failure of Penn Square forced Continental to examine its loan policies and asset quality Nonperforming loans increased to 19 billion at the end of 1983 leading to the
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