Continental Illinois: The Making of a Liquidity Crisis

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 80's, which lowered earning drastically and decreased the market value of bank equity, undermined customer confidence, and brought about net deposits outflows. By the …

…numerous policy issues. Throughout the crisis, the regulators guaranteed that none of Continental's depositors or other creditors would lose anything. Because most failures involve small banks, Continental's special treatment constitutes discrimination against small banks. Extreme reliance on hot money increases a bank's liquidity risk and frisk for the entire banking system. Many banks have had to seek stable retail deposits, limit their asset growth, and generally increase their capital base to reduce potential funding problems.