The savings and loan crisis of the 1980 s
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The Savings and Loan Crisis of the 1980’s. “The Largest Theft in History ” - And a precedent for things to come. In A Nutshell. The Failure of 747 Savings and Loan Institutions Regulated by the FDIC & FHLBB

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The Savings and Loan Crisis of the 1980’s

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The Savings and Loan Crisis of the 1980’s

“The Largest Theft in History”

- And a precedent for things to come


In A Nutshell

  • The Failure of 747 Savings and Loan Institutions

  • Regulated by the FDIC & FHLBB

  • Caused by volatile interest rates in the 70’s, over regulation of S&L Institutions in the early 80’s, deregulation in the late 80’sand “junk”.

  • Massive federal bailout totaling in $160 Billion, majority of which paid for by the taxpayers.


Timeline

  • 1970’s:Fluctuating economy leads to unpredictable interest rates

  • 1980-1982:Statutory and regulatory changes give the S&L industry new powers to invest in areas of business and return to profitability.

  • 1982-1985:Reductions in the Bank Board's regulatory and supervisory staff. Industry assets increase by 56% between 1982 and 1985.

  • 1986-1989:Compounding losses as insolvent institutions are allowed to remain open and grow, allowing ever increasing losses to accumulate.

  • 1990-1991: Government bail-out totaling $162 billion


Conclusions

  • Strong and effective supervision of insured depository institutions is essential

  • The industry can’t have too much influence over regulators

  • Regulators need adequate resources

  • Insolvent, insured financial institutions must be closed promptly in order to minimize potential losses


S&L Industry of the Early 80’s

  • FSLIC insured approximately 4,000 state- and federally chartered savings and loan institutions with total assets of $604 billion.

  • 118 S&Ls with $43 billion in assets failed, costing the FSLIC an estimated $3.5 billion to resolve.

  • During the previous 45 years, only 143 S&Ls with $4.5 billion in assets had failed

  • Would have cost the FSLIC approximately $25 billion to close these insolvent institutions in early 1983.


Regulations and Supervision

  • Regulation of S&L’s separate from commercial banks and mutual savings banks.

  • Home Owners. Loan Act of 1933 empowered the FHLBB to charter and regulate federal savings and loan associations.

  • National Housing Act of 1934 created the FSLIC to provide federal deposit insurance for S&Ls similar to what the FDIC provided for commercial banks and mutual savings banks.


Early Response: Deregulation

  • The primary problem was the lack of FSLIC resources available to close insolvent S&Ls.

  • Political, legislative, and regulatory decisions in the early 1980s were imbued with a spirit of deregulation.

  • Reported capital was further augmented by the use of regulatory accounting principles (RAP) that were considerably more lax than generally accepted accounting principles (GAAP).


Deregulation Effects

  • Characterized by extremely rapid growth.

  • S&L growth was fueled by an influx of deposits into institutions willing to pay above-market interest rates.

  • The high-growth period between 1982 and 1985 was also the period when examination and supervision were weakest


Competitive Effects on Banking

  • Enactment of Garn.StGermain and the deregulation of asset powers by several key states caused S&Ls to adapt their strategies.

  • The troubled condition of S&Ls resulted in higher interest rates for all financial institutions

  • Because of continuing uncertainty about the FSLIC’s ability to close insolvent S&L’s, the deposit premium rose through 1989


Resolution

  • Losses in the S&L industry continued to mount as declining in real estate values deepened

  • Competitive Equality Banking Act of 1987 funded the FSLIC with to resolve insolvent institutions

  • Final cost of resolving failed S&Ls: $160 billion- $132 billion from federal taxpayers


Discussion Topic: Bail-Outs

Bail-Out Economics – Capitalism Contradiction

  • Buying troubled assets

  • Making capital infusions

  • Insuring bank assets

    Problems and Issues


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