Questions 1 –5 are based on this passage, mark one letter (A, B or C) on your answer sheet.
The US Banking System
The stability of the US banking system is maintained by means of supervision and regulation, inspections, deposit insurance, and loans to troubled banks. For over 50 years, these precautions have prevented banking panics. However, there have been some close calls. The collapse of Continental Illinois Bank ＆ Trusted Company of Chicago in 1984 did not bring down the banking system, but it certainly rattled some windows.
In the late 1970s, Continental soared to a leadership position among Midwestern banks. Parts of its growth strategy were risky, however. It made many loans in the energy field, including ＄1 billion that it took over from Penn Square Band of Okalahoma City. To obtain the funds it needed to make these loans, Continental relied heavily on short-term borrowing from other banks and large, 30-day certificates of deposit ----“hot money”, in banking jargon. At least one Continental officer saw danger signs and wrote a warning memo to her supervisors, but the memo went unheeded. Although the Comptroller of the Currency inspected Continental on a regular basis, it failed to see how serious its problems were going to be.
Penn Square Bank was closed by regulators in July 1982. When energy prices began to slip, most of the ＄1 billion in loans that Continental had taken over from the smaller banks turned out to be bad. Other loans to troubled companies such Chrysler, international Harvester, and Banff looked questionable. Seeing these problems, hot money owners began to pull their funds out of Continental.
By the spring in 1984, a run on Continental had begun. In May, the bank had to borrow ＄3.5 billion from the Fed to replace overnight funds it had lost. But this was not enough. To try to stem the outflow of deposits from Continental, the FDIC agreed to guarantee not just the first ＄100, 000 of each depositor’s money but all of it. Nevertheless, the run continued.
Federal regulators tried hard to find a sound bank that could take over Continental ---- a common way of rescuing failing banks. But Continental was just too big for anyone to buy. By July, all hope of a private sector rescue was dashed. Regulators faced a stark choice: Let Continental collapse, or take it over themselves.
Letting the bank fail seemed too risky. It was estimated that more than 100 banks had placed enough funds in Continental to put them at risk if Continental failed. Thus, on a rainy Thursday at the end of July, the FDIC in effect nationalized Continental Illinois at a cost of ＄4.5 billion. This kept the bank’s doors open and prevented a chain reaction. However, in all but a technical sense, Continental had become the biggest bank failure in US history.
1. In the spring of 1984, Continental experienced a run attributed to
A | short-term borrowing from other banks. |
B | risky growth strategy. |
C | Both A and B. |
2. By July, all hope of a private sector rescue was
A | destroyed. |
B | absurd. |
C | desperate. |
3. Which is not the reason that hot money owners began to pull their funds out of Continental?
A | Penn Square Bank was closed by regulators. |
B | find a sound bank was hard. |
C | loans that had taken over from the smaller banks turned out to be bad. |
4. Banking panics may not be prevented by means of
A | deposit insurance. |
B | inspections. |
C | long-term borrowing. |
5. Which one of the companies was not in trouble?
A | International Harvester. |
B | Chryster. |
C | Continental. |
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