Continental Illinois collapse and the first 'too big to fail' bailout

Continental Illinois, then the seventh-largest bank in the United States, had aggressively bought energy loan participations from the failed Penn Square Bank during the oil boom of the late 1970s, funding the growth with short-term borrowing in wholesale money markets rather than stable retail deposits. When rumors of insolvency spread in May 1984, uninsured depositors and foreign banks pulled more than $6 billion in a single week, one of the first large electronic bank runs. Regulators judged that Continental's size and web of interbank obligations made an ordinary failure too dangerous to the wider financial system, so the Federal Deposit Insurance Corporation extended a $7.5 billion loan package and effectively nationalized the bank, taking a large equity stake and absorbing its bad loans. During a congressional hearing on the rescue, one lawmaker complained regulators had created 'a new kind of bank... called too big to fail,' and the phrase stuck, becoming the standard term for institutions whose failure regulators feel they cannot allow.