Machine Translated by Google INTRODUCTORY

The causes of the crisis

Consequences and lessons learned
CONCLUSION

THEME: THE SAVINGS & LOANS CRISIS

PASSIVE ASSET MANAGEMENT PRESENTATION

TRAORE Ahamadou Ibrahim

REVIEWER: KANGOU KOMAN

May 23, 2024

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis
Consequences and lessons learned
CONCLUSION

Presentation outline

1 INTRODUCTORY

2 The causes of the crisis

Increase in interest rates
Asset-Liability Management Issues
Lack of supervision

3 Consequences and lessons learned

consequences on the economy as a whole
Lessons learned from the crisis

4 CONCLUSION

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis
Consequences and lessons learned
CONCLUSION

INTRODUCTORY

In the 1980s, the United States faced one of the most severe crises
in its financial history, with the massive collapse of the mortgage
lending institutions known as Savings and Loans (S&Ls). This
crisis was triggered by a series of economic and regulatory factors
that highlighted the risks inherent in asset-liability management
in the financial sector. S&Ls were financial institutions that
specialized in making mortgage loans, primarily to finance the
purchase of homes. The first savings bank was established
in 1831, and for 40 years there were few savings banks, found
only in a few Midwestern and Eastern states. One of the key
features of S&Ls was their model of fixed rate funding (deposits)
and variable rate assets (mortgages).

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis Increase in interest rates
Asset-Liability Management Issues
Consequences and lessons learned
CONCLUSION Lack of supervision

Decompartmentalization

In the late 1970s and early 1980s, we saw the removal of interest
rate caps, allowing S&Ls to offer higher interest rates to attract deposits
and compete with other financial institutions. And restrictions on the
types of loans S&Ls could make were eased, allowing riskier
investments in speculative real estate projects.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis Increase in interest rates
Asset-Liability Management Issues
Consequences and lessons learned
CONCLUSION Lack of supervision

Increase in interest rates

The subsequent collapse of real estate markets and notably
Inflation and Federal Reserve policies led to the accumulation of significant
financial losses. When interest rates rose, funding costs for S&Ls increased, while
income for fixed-rate mortgages remained unchanged. This has created
significant pressure on their profitability and solvency.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis Increase in interest rates
Asset-Liability Management Issues
Consequences and lessons learned
CONCLUSION Lack of supervision

Asset-Liability Management
Issues These institutions adopted aggressive lending
strategies, often without adequate risk assessment or collateral,
resulting in an accumulation of non-performing assets. They had
an unbalanced financing model, with long-term assets
(mortgages) funded by short-term deposits.
When interest rates began to rise, deposit costs rose faster than
loan income, straining the profitability of S&Ls.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis Increase in interest rates
Asset-Liability Management Issues
Consequences and lessons learned
CONCLUSION Lack of supervision

Lack of supervision When the

problem became clearly apparent, the lack of supervision and lax regulations had
already created an unhealthy environment conducive to fraud and
embezzlement.
To replenish their margins, S&Ls engaged in illegal activities such as insider
trading, embezzlement, and speculative investments. The regulator's
lack of oversight allowed the crisis to worsen, leading to unsustainable losses
for financial institutions.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis consequences on the economy as a whole
Consequences and lessons learned Lessons learned from the crisis
CONCLUSION

consequences on the economy as a whole First of all, the

collapse of the real estate markets. Falling real estate values and a glut of
foreclosed properties have led to a severe decline in real estate markets. The
failure of many S&L institutions has led to job losses in the financial industry. The
crisis has contributed to a broader economic recession, characterized by falling
consumption, business bankruptcies, reduced investment and significant job
losses, notably in the construction and construction sectors. real estate.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis consequences on the economy as a whole
Consequences and lessons learned Lessons learned from the crisis
CONCLUSION

Lessons learned from the crisis

The Federal Reserve (FED) always raises rates until they break something.

Savings banks (S&Ls) and regional banks shared a dependence on deposits.

Competition from money markets and other banks has weakened their liquidity
position.

The S&L crisis of the 1990s serves as a reminder of the dangers of lax
regulation.

On risk management: Financial

institutions have learned the need to closely align their assets and liabilities
in terms of duration and interest rate sensitivity to avoid catastrophic losses in
the event of sudden changes in the markets.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS
Machine Translated by Google INTRODUCTORY
The causes of the crisis
Consequences and lessons learned
CONCLUSION

The S&L crisis remains one of the darkest chapters in American financial
history, but it was also a source of important learning for the financial industry.
It highlighted the dangers of inadequate risk management and urged regulators
and financial institutions to implement measures to strengthen the stability
and resilience of the financial system as a whole. This case study highlights
the key drivers and lessons learned from the S&L crisis, with a particular focus on
asset-liability management risks in the financial sector.

TRAORE Ahamadou Ibrahim[0.3cm] REVIEWER: KANGOU KOMANTHEME: THE SAVINGS & LOANS CRISIS