The Savings and Loan Crisis and Its Relationship to Banking pptx

Chapter 4

The Savings and Loan Crisis The Savings and Loan Crisis

and Its Relationship and Its Relationship

to Banking to Banking

Introduction

No history of banking in the 1980s would be complete without a discussion of the

concurrent crisis in the savings and loan (S&L) industry. A review of the S&L debacle (as

it is commonly known today) provides several important lessons for financial-institution

regulators. Moreover, legislation enacted in response to the crisis substantially reformed

both bank and thrift regulation and dramatically altered the FDIC’s operations.

The causes of this debacle and the events surrounding its resolution have been docu￾mented and analyzed in great detail by academics, governmental bodies, former bank and

thrift regulators, and journalists. Although the FDIC had a role in monitoring events as they

unfolded and, indeed, played an important part in the eventual cleanup, until 1989 S&Ls

were regulated by the Federal Home Loan Bank Board (FHLBB, or Bank Board) and in￾sured by the Federal Savings and Loan Insurance Corporation (FSLIC) within a legislative

and historical framework separate from the one that surrounded commercial banks. This

chapter provides only an overview of the savings and loan crisis during the 1980s, with an

emphasis on its relationship to the banking crises of the decade. The discussion also high￾lights the differences in the regulatory structures and practices of the two industries that af￾fected how, and how well, failing institutions were handled by their respective deposit

insurers.

A brief overview of insolvencies in the S&L industry between 1980 and 1982, caused

by historically high interest rates, is followed by a review of the federal regulatory structure

and supervisory environment for S&Ls. The government’s response to the early S&L crisis

is then examined in greater detail, as are the dramatic developments that succeeded this re￾sponse. The corresponding competitive effects on commercial banks during the middle to

late 1980s are outlined. Finally, the resolution and lessons learned are summarized.

An Examination of the Banking Crises of the 1980s and Early 1990s Volume I

168 History of the EightiesLessons for the Future

1 U.S. League of Savings Institutions, Savings and Loan Sourcebook, (1982), 37. It should be noted that during the 1980s, the

state-sponsored insurance programs either collapsed or were abandoned.

2 For a discussion of these issues, see Chapter 6.

The S&L Industry, 19801982

In 1980, the FSLIC insured approximately 4,000 state- and federally chartered sav￾ings and loan institutions with total assets of $604 billion. The vast majority of these assets

were held in traditional S&L mortgage-related investments. Another 590 S&Ls with assets

of $12.2 billion were insured by state-sponsored insurance programs in Maryland, Massa￾chusetts, North Carolina, Ohio, and Pennsylvania.1 One-fifth of the federally insured S&Ls,

controlling 27 percent of total assets, were permanent stock associations, while the remain￾ing institutions in the industry were mutually owned. Like mutual savings banks, S&Ls

were losing money because of upwardly spiraling interest rates and asset/liability mis￾match.2 Net S&L income, which totaled $781 million in 1980, fell to negative $4.6 billion

and $4.1 billion in 1981 and 1982 (see table 4.1).

During the first three years of the decade, 118 S&Ls with $43 billion in assets failed,

costing the FSLIC an estimated $3.5 billion to resolve. In comparison, during the previous

45 years, only 143 S&Ls with $4.5 billion in assets had failed, costing the agency $306 mil￾lion. From 1980 to 1982 there were also 493 voluntary mergers and 259 supervisory merg￾ers of savings and loan institutions (see table 4.2). The latter were technical failures but

Table 4.1

Selected Statistics, FSLIC-Insured Savings and Loans, 19801989

($Billions)

Number Total Net Tangible Tangible Capital/ No. Insolvent Assets in FSLIC

Year of S&Ls Assets Income Capital Total Assets S&Ls* Insolvent S&Ls* Reserves

1980 3,993 $ 604 $ 0.8 $32 5.3% 43 $ 0.4 $ 6.5

1981 3,751 640 −4.6 25 4.0 112 28.5 6.2

1982 3,287 686 −4.1 4 0.5 415 220.0 6.3

1983 3,146 814 1.9 4 0.4 515 284.6 6.4

1984 3,136 976 1.0 3 0.3 695 360.2 5.6

1985 3,246 1,068 3.7 8 0.8 705 358.3 4.6

1986 3,220 1,162 0.1 14 1.2 672 343.1 −6.3

1987 3,147 1,249 −7.8 9 0.7 672 353.8 −13.7

1988 2,949 1,349 −13.4 22 1.6 508 297.3 −75.0

1989 2,878 1,252 −17.6 10 0.8 516 290.8 NA

* Based on tangible-capital-to-assets ratio.