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
The Reagan Deregulation
- Federal requirements that set maximum
interest rates on savings accounts were phased out. This
eliminated the advantage previously held by savings
- 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
- 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
- In 1980 the US had 4,600 thrifts, by 1988
mergers and bankruptcies left 3000. By the mid 1990's less than
- 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
Steps Taken to Solve the
- Passed the Financial Reform, Recovery and
Enforcement Act (FIRREA)
- Abolished the independence of the S&L
- 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
- SAIF - Savings and Loan Insurance
Fund - for all savings type banks.
- BIF - Bank Insurance Fund - for
- Resolution Trust Company (RTF) created to
dispose of failed thrifts.
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