CONTINENTAL ILLINOIS, the Chicago bank, broke federal rules last month when it bailed out a subsidiary that had suffered heavy losses in the stock market crash. This case cuts both ways. It is now being used as an example both by people who want to let the banks get more deeply into the securities business and by those who want to keep the present limits.
When the bank bought First Options of Chicago Inc. a year ago, the regulators set conditions. The bank was to treat its new subsidiary like any other borrower, and a bank is limited in the amount that it can lend to any one customer. First Options finances stock and options traders, and it suffered severe losses in the stock market's drop on Oct. 19. On Oct. 20 the bank poured money into First Options to keep it from collapsing. There was no concealment from regulators; to the contrary, throughout the day the bank was continually in conversation with them. The regulatory agency directly concerned, the Office of the Comptroller of the Currency, found that the bank had lent too much and ordered it to reduce the loans. The bank complied within hours by transferring some of the loans to its parent holding company, Continental Illinois Corp.
The case is important because the administration wants to expand banks' authority to deal in securities, and believes that it can be done safely through subsidiaries. The comptroller, Robert L. Clarke, testifying before the House Banking Committee, argued that the Continental Illinois incident is a model of successful enforcement. It shows, he said, that the system works.
Not everyone on the committee seemed convinced. Shifting loans from the bank to the holding company does not necessarily do much to improve the safety of the enterprise as a whole. As this experience shows, there are tremendous pressures on a bank to protect a subsidiary in danger.
This one example does not settle the intricate question of banks and the securities business. In the months ahead Congress will undoubtedly learn more about what worked safely, and what did not, during the market's great slide. The central issue is whether a subsidiary can, in reality, be fully insulated from the bank that owns it. Until this month Congress was preparing to rewrite the banking laws in the atmosphere of boundless optimism generated by a tremendous five-year boom in the securities markets. Now the congressmen will have the advantage of working against a background of grimly realistic experience.