The Savings and Loan Crisis

Savings and loan crisis, completely destroyed the S&L market, was a consequence of a series
of events from 1970s to 1990s. Economic stagflation of 1970s with rise in inflation and interest
rates, government restrictions on the savings and loan institutions, bank run and subsequent
deregulations, unbridled S&Ls and government bailout are the top points in the crisis. In this
article, I would like to discuss the key role players in the savings and loan crisis, shortfalls of
the regulation which affected the S&L market and in the end, talk about the Garn-St.Germain
Depository Institutions Act.

Key role players in the S&L market:

Savings and loan institutions played the central role in the whole crisis. These institutions
otherwise known as thrift institutions providing loan to build homes to the low income
households was begun by the Federal Home Loan Bank act of 1932 and created a market for
home mortgages. These institutions have been heavily concentrated on the home loans, thus
this low diversification made the crisis even more severe. Another important role was played
by Federal Savings and Loan Insurance Corporation (FSLIC), who insured all the savings
and loan deposits. They failed to oversee the S&L institutions in their investments of high risk
projects and still insured the failing institutions. In the end they needed bailout from the tax
payers money. Federal government played the catalyst role in the whole crisis as their attempt
to mitigate the initial downturn with deregulation of the banking industry with the Garn-
St.Germain Depository Institutions Act had made the situation even worse. They failed to see
the long term consequence of the act which tried to solve the situation at hand. Also as they cut
the budget of Federal Home Loan Bank Board which hindered their oversight on the market.
There are some other players played minor role in the crisis: greedy legislators, money market
institutions etc. After the crisis, FSLIC was dissolved and Office of Thrift Supervision was
established and placed thrifts’ insurance under the FDIC. And Resolution Trust Corporation
(RTC) was established and funded to resolve the remaining troubled S&Ls.
Shortfalls of the the Garn-St.Germain Depository Institutions Act:

This act removed the interest rate ceiling for the banks and thrifts and let thrifts to provide
commercial loans. This was an attempt to fuel the Savings and Loan market. Though this act
succeeded at the beginning, but as the deregulation happened, the institutions got careless and
provided high interests on the deposits and invested in high risk, high return projects as they
were all insured by the FSLIC. The regulation failed to foresee this consequence.

The act also increased the insurance level from $40,000 to $100,000 per depositor. Which made
it possible for thrifts that are financially weak to continue operations causing the losses to pile
up, and in the end the fed needed to bail them out. The deregulation did not have any measures
in such cases and failed to control this from happening.

Level of regulation the Garn-St.Germain Depository Institutions Act:

Level of regulation can be categorized as four types: International vs Domestic, Governmental

vs Non-Governmental, Industry Specific vs Market-wide, and Direct vs Indirect. The Garn-
St.Germain Depository Institutions Act was a domestic, governmental, industry specific and
direct act. The act was only for US market imposed by the federal government. The act was
imposed and regulated by the several federal governmental agencies. It was focused on the
depository and loan institutions mostly banks and thrifts. This only impacted the S&L market
and the regulators are also for the specific industry itself. The act removed the interest rate
ceiling which directly impacted the market, as institutions started to increase the deposit
interests rate to attract customers, also the permission to lend to the commercial clients made
the thrifts involve in those activities which was previously off. Overall the act had an direct
impact on the market and for the worse as it deteriorated the crisis even more where the
government needed to bail out institutions with $124 billions of taxpayers money.