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Chelsea Bailey
Week 05 Assignment
2. What were the reasons for the crisis of the savings institutions industry in the late 1970s
and early 1980s? (14-1) During October 1979-October 1982, the Federal Reserve radically
changed its monetary policy strategy by targeting bank reserves rather than interest rates, in an
attempt to lower the underlying rate of inflation.

3. What two major pieces of legislation were adopted in the early 1980s to ameliorate the
thrift crisis? Explain. (14-1) The Depository Institutions Deregulation and Monetary Control
Act and the Garn-St. Germain Depository Institutions Act of 1982. These acts expanded savings
institutions’ deposit-taking and asset investment powers.

4. What shortcomings in the Depository Institutions Deregulation and Monetary Control

Act of 1980 (DIDMCA) and the Garn-St. Germain Depository Institutions Act of 1982
(GSGDIA) contributed to the failure of the SI industry? (14-1) For the small groups, the new
regulartions meant the opportunity to take more asset-side risks, which could return in
profitability. After the junk bond market collapsed, savings institutions wanted to liquidate their
holdings, and small groups were unable to find sufficient buyers for the bonds. Stuck with these
bonds, many savings institutions suffered large losses.

6. What are the main assets and liabilities held by savings institutions? (14-2) Assets
include: mortgage loans, MBS, and consumer loans. Liabilities include: borrowed money and
federal funds and repos

8. What has happened to the value of savings institutions’ charters in the period of time
since October 1979? How did this shift contribute to the crisis in the savings institution
industry? (14-3)

14. What are the main assets and liabilities held by credit unions? (14-6) Main assets
include: Reserves at Federal Reserve, checkable deposits and currency, time and savings
deposits, agency and GSE-backed securities, other credit market securities, home mortgages, and
consumer credit. Main liabilities include: checkable deposits, small time and savings deposits,
and shares/deposits.

16. Why did commercial banks pursue legal action against the credit union industry in the
late 1990s? What was the result of this legal action? (14-5) They filed two lawsuits in its
push to restrict the growing competitive threat from credit unions. The first lawsuit challenged
an occupation-based credit union’s ability to accept members from companies unrelated ot the
firm that originally sponsored the credit union. The second, the American Bankers Association
asked the courts to bar the federal government from allowing occupation-based credit unions to
conver to community-based charters. Bankers argued in both lawsuits, and the Supreme Court
sided with the banks in its decision that credit unions could no longer accept members that were
not a part of the “common bond” of membership.
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Chelsea Bailey
Week 05 Assignment
18. What are the three types of finance companies and how do they differ from
commercial banks? (14-7) Sales Finance Institutions, Personal Credit Institutions, and
Business Credit Institutions. They differ from commercial banks because they specialize in
making loans to customers of a specific retailer or manufacturer.

20. What are the major assets and liabilities held by finance companies? (14-8)

The major assets and liabilities include: consumer, business, real estate, bank loans, commercial
paper.

22. Why was the reported rate on motor vehicle loans historically higher for a finance
company than a commercial bank? Why did this change in 1997? (14-8) Motor Vehicle
Loans were higher because auto finance companies started charging interest rates that were a
percentage higher than those of commercial banks. It changed in 1997 because firms were lower
than normal, finance companies owned by the major auto manufacturers slashed the interest rates
charged on new car loans over this period.
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Chelsea Bailey
Week 05 Assignment
Resources

Saunders, Anthony and Cornet, Marcia Millon. Financial Markets and Institutions. 2012.