The savings and loans crisis, otherwise known as the S&L crisis, transpired during the late 70s, reached its peak in the 80s, and ended in the early 90s. A savings and loans institution is a special type of bank that provided various services aimed at promoting home ownership. When this financial institution was first developed, it’s goal was to enable people to place their savings with the bank as well as obtain various loans such as personal, auto, or house mortgages. Also called as “thrift,” this institution became popular not only in the United States, but also in United Kingdom where it was referred to as Building Society.
When people started putting their funds in the money market, because of the higher interest rates, S&L tried to compete and increase its rates of interest, but it ultimately failed. The institution could not maintain the high levels of interest rates since it only made money from mortgages and loans. What the institution tried to do, in an effort to offset their inability to maintain the high interest rates, was to offer other alternative investment opportunities to its members such as bonds and commercial realty mortgages. These investments were dangerous and risky for S&L given the fact that the institution did not have enough money to sustain these financial activities.
At first, its depositors tried to invest in these financial options since they are insured and protected by the Federal Savings and Loan Insurance Corp. or FSLIC. But, because of corruption scandals and other illegal activities, the S&L companies became bankrupt and were given no choice but to close down. Taxpayers’ money was used by the government to bailout 747 S&L institutions which was said to be one of the major causes of the budget deficit at that time.
What Caused the Savings and Loans Crisis?
Federal Deposit Insurance Premium Policy.
One of the contributing factors that led to the savings and loans crisis was the federal deposit insurance corporation or FDIC. This insurance was offered to savings and loans institutions in 1934. It stated that the same premium be given to all S&L members no matter how risky the transaction might be. The government continued to provide deposit insurance to any S&L transactions despite it being unstable. In 1991, the government tried to correct this problem by asking the FDIC to increase the premiums for those transactions that were likely to be risky and unsafe. However, the FDIC did not take heed of this amendment since it feared tremendous complaints, criticisms, and great loss of members who have made these types of transactions. As a result, the same amount of premium was paid for by members regardless of the risks involved.
Regulation Q
This is part of the banking act imposed by the law of federal regulations. It stated that any financial institutions, including banks and S&L companies, were prohibited to provide any interest on demand deposits or checking accounts. It also stated that financial institutions give higher interest rates on other kinds of banking transactions such as time deposit and savings account. In 1966, Regulation Q was extended to all S&L companies. The fixed amount of interest imposed by this policy enabled S&L companies to continue on for a few more years. The deposits made by members were actually used to cover loan and mortgages transactions.
Expansion and Branches Restrictions
A law was imposed preventing banking institutions as well as S&L companies to expand or put up branches. This made S&L institutions more susceptible to risks and downturns. Regional crisis greatly contributed to the decrease in real estate value. Some of these properties were made as collateral by most savings and loans members.
Resuscitation of S&L
Because of the impact brought on by the savings and loans crisis, the government approved a bill that would help change the banking industry, the federal rules that went with it and help people avoid bad credit loans. In 1989, most of the savings and loans companies were merged with larger commercial banking institutions. The federal regulations that governed all banking and financial institutions have also been modified to answer to the needs of the industry. In 2004, more than 800 S&L institutions made around one trillion dollars in assets. There are also bank holding institutions that possess two of the biggest S&L companies, namely, World Savings Bank and Washington Mutual Bank. These two major S&L companies made a hundred billion dollars in assets. While some independent S&L companies have assets that are more than a billion dollars.
With the implementation of the financial reform law, S&L companies continue to thrive despite the continuous economic recession. Although the number of these companies is decreasing, people will not feel any of the effects since there are a lot of banking institutions nowadays that provide the same service and follow the same regulations of savings and loans companies. The government continues to monitor and observe the regulations as well as the finance and banking policy implementation in order to ensure the stability of the industry.