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Al Renner Stephanie Hilgeford Charlotte Ford-Cunningham

Al Renner Stephanie Hilgeford Charlotte Ford-Cunningham. Failed Incentives in the Savings and Loan Industry. Agenda. Magnitude of the crisis Cost of the crisis Historical timeline Rean and conceptual issues Lesislative and regulatory measures Accounting principles

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Al Renner Stephanie Hilgeford Charlotte Ford-Cunningham

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  1. Al Renner Stephanie Hilgeford Charlotte Ford-Cunningham Failed Incentives in the Savings and Loan Industry

  2. Agenda • Magnitude of the crisis • Cost of the crisis • Historical timeline • Rean and conceptual issues • Lesislative and regulatory measures • Accounting principles • Insuring and regulatory agencies

  3. Magnitude of The S&L Crisis • ’86-’89: FSLIC closed 296 S&L, assets of $125 billion • ’89-’95: RTC closed 747 S&L, assets of $394 billion • Total: 1,043 S&L, $519 billion • ’86-’95: S&L reduced from 3,234 S&L to 1,645 (50%) (FDIC Banking Review)

  4. Cost of The S&L Crisis • Direct costs of closing S&L $146 billion • Indirect costs of closing S&L $7.4 billion • Total costs: $153 billion • Total cost: taxpayers $124 billion (81%), S&L industry $29 billion (19%) • Pre 1986 costs paid by solvent FSLIC (FDIC Banking Review)

  5. Historical Timeline • 1932 - Federal Home Loan Bank Board • 1934 - Federal Savings and Loan Insurance Corporation (FSLIC) • 1966 - Regulation Q applied to S&L • 1970s - Double digit inflation, high interest rates • 1980 - Depository Institutions Deregulation & Monetary Control Act

  6. Historical Timeline • 1981 - FHLBB allows GAAP or RAP • 1982 - Garn–St. Germain Depository Institutions Act • 1983 - 35% S&L losing money, 9% insolvent by GAAP standards • 1985 - Gov declares Ohio bank holiday • 1985 - FSLIC down to $4 billion; had lost $20 billion

  7. Historical Timeline • 1987 - TX has 14 of 20 largest losses; 50% of all nationwide • JAN 1987 - GAO declares FSLIC insolvent by $3.8 billion • 1987 - Competitive Equity Banking Act • 1989 - President Bush announces taxpayer funded rescue plan

  8. Real and Conceptual Issues • High Inflation Rates • Causes the COG to increase • 1971 the gold standard was eliminated • Highest level 1980 – 14% • Excess supply of currency, high oil prices, delayed response to increasing rates • Principle-Agent Problem

  9. Real and Conceptual Issues • Maturity Mismatch • Long-term, fixed rate loans funded by short-term deposits • Regulation Q – 1933 • Interest rate ceilings

  10. Real and Conceptual Issues • Deregulation – 1982 • Garn – St. Germain Depository Institutions Act • Removal of interest rate ceilings • Delayed Closure of Insolvent S&Ls • FSLIC - 3 rescue programs • Incentives to continue to operate

  11. Legislative and Regulatory Enhance both the short-term and long-term economic survival of the thrift industry. "Bide" time for legislative and regulatory efforts to affect an economic recovery. Encourage "leveraged" asset growth through debt financing Halt and prevent the massive withdraws of funds by depositors (disintermediation) (Tucker & Salam, 1994)

  12. Regulatory Accounting Principles (RAP) Generally Accepted Accounting Procedures (GAAP) • GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. Regulatory accounting principles and interpretations authorized by the FHLBB.

  13. Federal Insuring Agencies • Federal Home Loan Bank Board (FHLBB) regulatory agency • Federal Savings and Loan Insurance Corporation (FSLIC) to insure deposits at S&L institutions • Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) • Federal Deposit Insurance Company (FDIC) Improvement Act of 1991

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