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Savings & Loan Crisis

February 22,
2016
Presented By: (Group
III)
Anoop Kumar Sharma
(420)
Anuj Paul (421)
Apoorva Sharma (422)
Ashish Singh (425)

Agenda
Introduction S & L Crisis
Causes
Government Response
Resolution
Learning's & Conclusion

Agenda
Introduction S & L Crisis
Causes
Government Response
Resolution
Learning's & Conclusion

Definition:
Saving and Loan Associations (thrift institutions)
are deposit-taking institutions initially created
for the purpose of taking in deposits from
private citizens and using them to make home
mortgage loans.
Function:
Intermediation function begins with taking in
deposits & paying interest. A higher return
must come from the lending in the form of
home mortgages. This function works best
when interest rates are low & stable.
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Timeline
1830s: The first U.S. S&L was founded in 1831
1930s: 11800 S&Ls, more than 12 million member,
600 million dollar of asset size, 22% of all home
mortgages & 10% of entire population
was member of these institutes.
1950s-1960s:
Generally stable interest rates & successful
operation and growth of S&Ls.
1970's: High inflation in the U.S. Regulation Q
Late 1970s: S&L industry starts showing first signs of
buckling and becoming insolvent.

1980: Deregulation
1981-1982: Recession hits the U.S. economy
Mid-1980s: Higher
depositors

interest

Percentage of S & L Asset in


Mortgage

rates

to

the

1987: The FSLIC, which was undercapitalized,


goes bankrupt. The CEBA was created to
recapitalize the FSLIC, but this failed.
1989: Highest number of S&L failures. The
bailout costs were high & many closed by
the government.
1990-91: Recession hits the U.S. economy.

Annual Data on S & L failure

Year

S&L
Failures

Year

S&L
Failures

1980

11

1992

60

1981

28

1993

1982

76

1994

1983

51

1995

1984

24

1996

1985

60

1997

1986

59

1998

1987

60

1999

1988

190

2000

1989

327

2001

1990

214

2002

1991

146

Source: FDIC Web


Site

Major Players
Depositors

Markets

FSLIC,
CEBA

Governme
nt

S&L
Associatio
ns

Agenda
Introduction S & L Crisis
Causes
Government Response
Resolution
Learning's & Conclusion

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What happened ?

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Insolvency of Federal loan & SavingInsurance


Corporation.

The governmentbailoutof the thrifts to the


tune of $124 billion in taxpayer dollars & the
liquidation of 747 insolvent S&Ls by the U.S.
government's Resolution Trust Corporation.

One of the largest S&L failures was that of


Lincoln S&L, part of the Keating Five scandal
which exposed the political corruption that
was part of the S&L Crisis.

Causes

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Greater percentage of their total loans in real


estate & in credit extended to assist corporate
takeovers & leveraged buyouts (called highly
leveraged transaction loans).

The existence of deposit insurance increased


moral hazard for banks because insured
depositors had little incentive to keep the
banks from taking on too much risk.

New financial instruments:


Financial futures
Junk bonds
Swaps

Causes (contd)

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Depository Institutions Deregulation and


Monetary Control Act (DIDMCA) of 1980 and
the Depository Institutions (GarnSt. Germain)
Act of 1982.

In 1989, Congress started knocking down the


barriers separating commercial banks from
S&Ls.

While many of the largest S&Ls are now


owned by bank holding companies, two
independent S&Ls - Washington Mutual Bank
and World Savings Bank - each had more than
$100 billion of assets.

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Agenda
Introduction S & L Crisis
Causes
Government Response
Resolution
Learning's & Conclusion

15

Government Response

16

Competitive Equality in Banking Act of 1987


provided FSLIC to borrow $10.8 billion to
resolve insolvent S&Ls & continued to pursue
regulatory forbearance.

In 1988 FSLIC resolved 222 S&Ls (asset of $116


billion).

Transactions were effected with minimal cash


outlays & maximum use of notes, guarantees,
&
tax
advantages,
which
made
these
transactions more costly.

Despite these resolutions, at year-end 1988


there were still 250 S&Ls, with $80.8 billion in
assets,
that
were
insolvent
based
on

Agenda
Introduction S & L Crisis
Causes
Government Response
Resolution
Learning's & Conclusion

17

Resolution
Financial Institutions Reform, Recovery, &
Enforcement Act (FIRREA), was signed into law
on August 9, 1989.
Eliminated Federal Home Loan Bank Board &
the FSLIC and enhanced enforcement powers of
thrift regulators.

Regulatory role of the Federal Home Loan Bank


Board was relegated to the Office of Thrift
Supervision (OTS).

FDIC with regulatory responsibilities of the


FSLIC became the sole administrator of the
federal deposit insurance system with two
separate insurance funds:

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Bank Insurance Fund (BIF) &

Resolution (contd)

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Resolution
Trust
Corporation
(RTC),
was
established to sell $450 billion real estate
owned by failed institutions.

RTC seized assets of 750 insolvent S&Ls, & sold


over 95% of them, with recovery rate exceeding
85%.

Cost of bailout $150 billion, came partly from


capital in Federal Home Loan Banks & mostly
from sale of govt. debt by both Treasury &
Resolution Funding Corporation.

FIRREA also increased the core-capital leverage


requirement from 3% to 8% & imposed the
same
risk-based
capital
standards
on

Resolution (contd)

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Federal
Deposit
Insurance
Corporation
Improvement Act (FDICIA) was passed to
recapitalize Bank Insurance Fund by increasing
FDICs ability to borrow from Treasury.

FDIC had to assess higher deposit insurance


premiums until it could pay back its loans &
have reserves in its insurance funds equal to
1.25% of insured deposits.

Too-big-to-fail doctrine has been substantially


limited & banks were classified into five
groups based on capital.

Well
Capitalized,
Undercapitalized,

Adequately

Capitalized,
Significantly

Agenda
Introduction S & L Crisis
Causes
Government Response
Resolution
Learning's & Conclusion

21

Learnings from S&L crisis

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The damaging effects of high inflation &


interest rates on financial intermediaries, an
obvious argument for controlling domestic
inflation.

The negative effects of quick deregulation and


lack of oversight as well as the moral-hazard
and adverse-selection problems caused by
deposit
insurance.

Lack of depositor oversight caused by


insurance cannot be ignored either. Deposit
insurance should be established so that it
minimizes these problems & yet provides the
stability & protection needed by small
depositors.

Learnings from S&L crisis cont.

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This analysis has presented evidence that


S&L failures were a leading cause of the
recessions of the early 1980s and early
1990s.

The failed institutions may have had as much


as a 23% effect on GDP. The recessions
partially caused by the S&L crisis were from
deadweight
losses,
slow
payouts
to
depositors, and unemployment. Also there
was a general loss of faith in deposit
institutions.

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Thank You

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