Penn Square Bank: Anniversary of a Failure that Changed Finance Forever

Joe Wertz Bio Recent Stories Joe Wertz was a reporter and managing editor for StateImpact Oklahoma from 2011-2019. He reported on energy and environment issues for national NPR audiences and other national outlets. He previously worked as a managing editor, assistant editor and staff reporter at several major Oklahoma newspapers and studied journalism at the University of Central Oklahoma.

Founded in 1960, Oklahoma City’s Penn Square Bank made a spark with its shopping mall setting and drive-through teller window convenience.

By the mid-’70s, the bank shifted from suburban housewives to focus on financing a new customer: the oil and gas industry. The bank grew by “aggressively making large and speculative loans” to the energy industry, according a historical account of bank crises by the Federal Deposit Insurance Corporation. But oil prices peaked in April 1981 and started to fall. A year later, rumors of problems spooked a deposit runoff, and on July 5, 1982 Penn Square Bank was declared insolvent.

The Penn Square Bank’s “abusive practices” were funded by banks, savings and loans and credit unions throughout the U.S, the FDIC chairman at the time said. The sole motivation: a “desire to make a fast buck.”

The bank’s failure changed finance forever.

At first, lending to oil and gas companies was a gusher. Penn Square Bank had $62 million in assets in 1977; by 1982, it had $520 million, according to the FDIC’s historical account:

Penn Square then sold majority interests in those loans to other banks (in the form of loan participations), but retained the responsibility for servicing the entire loan amount. At its failure, Penn Square was servicing approximately $2 billion in loans.

And most of the $2 billion in loans were high-risk, and had been sold to out-of-state banks, reports the Journal Record‘s Brianna Bailey. Rumors became a frenzy, and a “full-scale run” on the bank erupted on July 2, 1982.

“Some people got a little rowdy,” former cashier Jim Pitts tells the paper. “I remember this little elderly woman, she got really hostile. I didn’t blame her at all. She just wanted her money and she couldn’t get it right then.”

Here’s how the Associated Press described it then:

Hundreds of depositors seeking their money crowded the former Penn Square Bank on Tuesday as the federal government began liquidating the 21st bank to fail in the United States this year … Nearly 100 people stood outside the bank’s doors at noon, waiting to enter the lobby jammed with depositors. A continuous line of cars wound through the drive-in lanes. Bank workers handed out glasses of iced water to those waiting outdoors in the 90-degree heat.”

But there were warning signs.

There were tales of OKC oil and gas men taking helicopters to Dallas for lunch, the Journal Record recalls, all of which were “financed with high-interest-rate loans from Penn Square Bank.”

James Finch, who worked at Citizens National Bank, said Penn Square would approve loans for borrowers his bank had just turned down, the Oklahoma Gazette reports.

And Finch also remembers Penn Square Bank recruiters calling him and his colleagues to woo them away from Citizens National by doubling their salaries and giving them lavish corporate perks. He thought it sounded too good to be true.

It was.

Oklahoma Bankers Association President Roger Beverage recalled that of the more than $450 million in deposits, nearly half that amount was over the FDIC’s insured limit, Dean Anderson writes in the Gazette.

The Penn Square bank collapse dominoed from one side of the country to the other. Losses at Seattle First National Bank helped force its merger with Bank of America. The failure of Chicago’s Continental Illinois National Bank and Trust Company — the country’s largest ever — was blamed on the Penn Square fiasco, which also brought New York’s Chase Manhattan “to its knees,” the Gazette reports.

The Penn Square Bank meltdown helped usher in banking reforms and regulation at the state and federal level, including the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991.