Stage set for US banking's own 'recovery'

Big No. 6 deflated this summer. In May, Continental Illinois National Bank & Trust of Chicago, once one of the most aggressive ''money center'' banks in the country, saw its deposits escape like air out of a balloon. Although customers in the lobby would notice little change in the bank, on paper - in deposits and in its stock price - the bank dwindled, almost overnight. By July what was once the nation's sixth-largest bank had become a moderate-size, government controlled, also-ran.

The restructuring of Continental Illinois and the chronic problems of foreign debtors have caused concern among bankers, customers, regulators, investors, economists, politicians - anyone worried about a repeat of the massive loss of confidence in banking that occurred in the late 1920s and '30s.

But unless an unforeseen financial crisis develops in the United States or abroad, many banking analysts say, America's dozen biggest ''money center'' banks may have come through the worst of it. Although saddled with poorly performing foreign loans, they are slowly reducing the threat from these loans through debt rescheduling, by taking tax-loss write-offs, and by adding to their bank capital.

How did the financial stalwarts of Main Street get into this pickle? Is what happened to Continental Illinois possible at other big ''money center'' banks?

Just asking about the solidity of a big American bank is risky. If a reputable authority predicts a problem at a particular bank, and if he is believed, he may be contributing to a run on the bank - a massive loss of confidence - that brings the walls tumbling down.

The run on Continential Illinois, in the view of many analysts, was not the tip of a massive iceberg of banking problems in the US. Rather, Continental Illinois was the victim of poor management and peculiar circumstances aggravated by rumor and fear.

While that leaves the overall banking system - and most of the 14,700 banks in the country - sound, there could still be other bank failures. Banks go under every year, usually without much hoopla, but analysts do not see any problems the size of Continental on the horizon. Moreover, the Continental failure may serve to chasten the more daring banks, at least for a while.

The Federal Deposit Insurance Corporation (FDIC) keeps a list of the ''problem banks'' in the country. Their names, locations, assets - all such information is a strict secret. But the trend of the aggregate numbers alone is instructive:

In the summer of 1982, there were 268 banks on the problem list.

In the summer of 1983, 534 were on the list.

As of August 1984, there are 721 banks on the list.

The FDIC reports that 49 American banks have failed so far this year, already surpassing the total for 1983. The largest number of bank failures on record was 60 in 1939.

Bank failures, economists observe, tend to lag failures in American industry, since it takes a while for the failures of business to pass through to the ''bottom line'' on bank financial statements. Some of the problems today at regional banks in Texas, for instance, stem from bankruptcies and loan delinquencies in the oil business, which went sour as far back as 1981, when oil prices began to fall.

Such were the conditions that caused highly speculative energy loans to go bad and precipitated the failure in July 1982 of Penn Square bank of Oklahoma City. Penn Square had sold Continental Illinois $1 billion of its loans. Continental Illinois has been faulted for being too aggressive a lender, for failing to examine the Penn Square loans thoroughly, and for alleged improper behavior between Penn Square and Continental Illinois loan officers.

Still, it was two more years - during which time everyone knew that Continental Illinois was holding these bad loans - before a loss of confidence in Continental Illinois occurred.

That was last May. At the time, the foreign-debt crisis looked bad. Interest rates seemed set to go higher. The stock and bond markets were dismal. A rumor about Continental Illinois's solvency started in the Far East. Before the rumor was squelched, there was a massive run on deposits. The bank was in danger.

Then, after 16 major banks tried unsuccessfully to bail the bank out, the government stepped in.

The Federal Reserve, the FDIC, and the Comptroller of the Currency apparently reasoned that if Continental Illinois went under it would adversely affect other banks and profoundly shake faith in the US banking system. To prevent this, the FDIC took the controversial step of guaranteeing all deposits - not just those up to $100,000. The FDIC, as it routinely does in such cases, actively sought a merger partner for Continental Illinois.

But that did not work. Because it operates in a ''unit banking'' state - a state that does not allow branch banking - Continental's nonloan assets (real estate, customer base, etc.) were not very attractive to other banks. Illinois law was modified after the run on Continental to allow the operation of bank holding companies within regions of the state, but Illinois still has one of the most restrictive sets of unit-banking laws in the nation.

The FDIC searched for a merger partner, but there were no takers. Finally, in a complex financial arrangement, the FDIC acted to reorganize the bank and agreed to take over a portfolio of bad loans. Most of Continental Illinois customers will not notice the difference, but, if stockholders approve at a meeting late next month, the bank will be controlled primarily by the federal government.

At the same time, the Fed opened its ''discount window'' to Continental. Twenty-eight big banks extended a $5.5 billion line of credit to the foundering bank. Even so, Continental has had to continue borrowing heavily from the Fed because of a continuing run on deposits.

While the bricks and mortar of the bank may look the same, the assets of the bank - and the price of its stock - have shrunk to a fraction of their value at the start of 1984.

The House Banking Committee and the Securities and Exchange Commission are investigating the Continental crisis; the SEC is particularly interested in allegations that Continental maintained an inadequate reserve for loan losses. The American Bankers Association has commissioned a study to determine if there are reforms within the banking profession that can help prevent a recurrence of the Continental Illinois problem.

The government's fail-safe apparatus for maintaining the safety of the banking system worked, but it was a tricky episode. George M. Salem, banking analyst of the Becker Paribas brokerage firm, notes: ''If there were a Richter scale to measure threats to the stability of the world financial system, and it had a top value of 10, the events of May-July 1984 were probably 91/2.''