The Savings and Loan Crisis, or commonly known as S&L, is termed as one of the largest financial crisis in the United States history. The crisis began in the late 1970s, and it impacts on the economy was felt in the 1980s and ended in the early 1990s. Various sources have indicated the causes of the S&L crises. Some of the documented reasons include high and volatile interest rates during the period, the phase-out and its elimination, negative regional economic conditions, and federal and state deregulation of depository institutions. Other reasons include deregulation of the thrift industry, declining regulatory capital requirements, excessive chartering of emerging thrifts, the withdrawal of federal tax laws in 1986, emergence of brokered deposit market, and delay in identifying the thrift insurance funds (Curry and Shibut 27). These factors, especially the volatile interest rates, influenced the depositors to shift to the money market in search for high interests' rates, and hence adversely affecting the S&Ls. After the regulations in S&L had been loosened, the S&L started participating in risky activities such as investments in unwanted bonds and lending in commercial real estate (Federal Deposit Insurance Corporation 180).
For the United States economy to survive, the Congress identified the resolution to mitigate the thrift industry's problem in the late 1980s. The Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989 and involved the taxpayers in mitigating the problem (Curry and Shibut 28). This institution established many reforms to clean up the industry. During the same period, the Federal Home Loan Bank Board, the key S&L regulator, was demolished, and Congress replaced it with the Office of Thrift Supervision (Robinson). The Congress also retained the thrifts' insurance on the Federal Deposit Insurance Corporation (FDIC). Additionally, the RTC (Resolution Trust Corporation) was developed and funded to mitigate the remaining issues in the S&L industry. One of the significant moves of cleanup in the industry involved closing about 747 Savings and Loans that had assets worth $407 billion (Robinson). The crisis ended December 31, 1995 when the RTC was closed. The thrift crises cost the taxpayers around $124 billion and $29 billion to the thrift industry (Curry and Shibut 33). The crisis also acted as a cornerstone for reform legislation that enhanced profitability and stability.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) covered several reforms that were aimed at regulating and supervising banks, and the FDICIA allowed the Federal Reserve to be involved in earlier mitigation of bank failure. In addition, the FDCIA ordered the closure of the failing banks using the least-cost method. FIRREA also allowed the regulators to limit the institution's activities and growths as a way of enhancing the powers of the banking regulatory agencies. These and other measures allowed the crises to end after lasting for almost 25 years. In 1982, the effect of crisis was reflected by the negative economic growth rate of -1.9, which was relatively worse compared to -0.3 in 2008 (The World Bank).
Saving and Loan Institution is a financial association that deals with deposits, mortgage loans, and savings and is one of the fundamental sources of mortgage loans in the United States today. The borrowers and depositors are members of the institution, and they have voting rights and can direct the managerial and financial goals of the institution. They are characterized by locally or privately managed financial organizations and disperses loans for refinancing, construction, and home repairs. In 1965, before the crisis, the S&Ls were 6,071, and they have reduced to 327 by 1989. The decrease because of the high-interest rates that continue to increase the borrowing costs hence discourage the mortgage business. In addition, the stiff competition emerged and hence limited the S&Ls from making the profits that they used to make. However, the numbers have increased to 1,103 at the start of the 21st century, and they retain the second position in the repository for consumer savings (Economic History Services).
Works Cited
Curry, Timothy, and Lynn Shibut. "The Cost of the Savings and Loan Crisis: Truth and Consequences." FDIC Banking Review (1986).
Economic History Services. "Savings and Loan Industry (U.S.)." Economic History Services, Web. 27 Apr. 2016. <https://eh.net/encyclopedia/savings-and-loan-industry-u-s/>.
Federal Deposit Insurance Corporation. History of the Eighties: Lessons for the Future. An Examination of the Banking Crises of the 1980s and Early 1990s. Washington: Federal Deposit Insurance Corporation, 1997. Print.
Robinson, Kenneth J. "Savings and Loan Crisis - A Detailed Essay on an Important Event in the History of the Federal Reserve." The Federal Reserve History Gateway Provides Historical Materials That Illustrate How the Fed Has Changed over Its First 100 Years. The Federal Reserve History, 22 Nov. 2013. Web. 27 Apr. 2016. <http://www.federalreservehistory.org/Events/DetailView/42>.
The World Bank. "GDP Growth (annual %) | Data | Table." Data | The World Bank. The World Bank, 2016. Web. 27 Apr. 2016. <http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=1>.
