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Banking Crisis and Reform

There are many people that feel that the government should remove much of the regulations placed on banks and allow them to compete on the open market. Regulations, they feel, destroy the ability of banks to make money, raises costs, lowers interest rates paid to depositors and is not generally not good for the bank or the consumer. This was the belief of the Carter and Reagan Administration's in the late 70's and early 80's. The result of this rather laissez faire approach was a period of deregulation. What is meant by deregulation is the removal of, or lessening of government regulations restricting an industry. Deregulation has effected many industries in recent years, including banking.

The Reagan Deregulation Program

  • Federal requirements that set maximum interest rates on savings accounts were phased out. This eliminated the advantage previously held by savings banks.
  • Checking accounts could now be offered by any type of bank.
  • All depository institution could now borrow from the fed in time of need, a privilege that had been reserved for commercial banks. In return all banks had to place a certain % of their deposits in the fed. This gave the FED more control and stabilized state banks.
  • Garn - St. Germain Act of 1982 allowed savings banks to now issue credit cards, make non residential real estate loans and commercial loans; actions previously only allowed to commercial banks.

The Effect of Deregulation - The S&L Crisis

  • Deregulation practically eliminated the distinction between commercial and savings banks.
  • Deregulation caused a rapid growth of savings banks and S&L's that now made all types of non homeowner related loans. Now that S%L's could tap into the huge profit centers of commercial real estate investments and credit card issuing many entrepreneurs looked to the loosely regulated S&L's as a profit making center.
  • As the eighties wore on the economy appeared to grow. Interest rates continued to go up as well as real estate speculation. The real estate market was in what is known as a "boom" mode. Many S&L's took advantage of the lack of supervision and regulations to make highly speculative investments, in many cases loaning more money then they really should.
  • When the real estate market crashed, and it did so in dramatic fashion, the S&L's were crushed. They now owned properties that they had paid enormous amounts of money for but weren't worth a fraction of what they paid. Many went bankrupt, losing their depositors money. This was known as the S&L Crisis.
  • In 1980 the US had 4,600 thrifts, by 1988 mergers and bankruptcies left 3000. By the mid 1990's less than 2000 survived.
  • The S&L crisis cost about 600 Billion dollars in "bailouts." This is 1500 dollars from every man woman and child in the US.
  • In summary, the S&L crisis was caused by deregulation which led to high interest rates that then collapsed. Other causes included inadequate capital and defrauding shorthanded government regulatory agencies (less regulators and inspectors).

Steps Taken to Solve the S&L Crisis

  • Passed the Financial Reform, Recovery and Enforcement Act (FIRREA)
  • Abolished the independence of the S&L industry.
  • Abolished the Federal Home Loan Bank Board which gad been in charge of supervising S&L's
  • New agency Office of Thrift Supervision (OTS) created as part of the executive branch.
  • Changed Federal Insurance.
    • FSLIC eliminated and responsibilities transferred to FDIC.
    • Two separate funds were created within the FDIC:
      • SAIF - Savings and Loan Insurance Fund - for all savings type banks.
      • BIF - Bank Insurance Fund - for commercial banks.
  • Resolution Trust Company (RTF) created to dispose of failed thrifts.

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