Uninsured Deposits as a Source of Market Discipline: Some New Evidence
Money center banks typically place a heavy reliance on purchased funds, not explicitly insured by the FDIC. Suppliers of these funds will withdraw them from a bank if they believe that losses are imminent. Since the creation of the FDIC such deposit runs have been rare. But in the 1980s Continental Illinois National Bank experienced two deposit runs. The first occurred after the failure of Penn Square National Bank in July 1982 and the subsequent discovery that Continental had purchased more than a billion dollars of Penn Square energy loans. The second run occurred in spring 1984 and eventually forced the FDIC to guarantee all of Continental's creditors.