Other Lending Institution Saving

Institutions Credit Unions And

Finance Company
 Financial services

Saving Finance
Credit union
institution companies

Saving bank Saving association

Savings Institutions (SIs)
•Historically referred to as Savings and Loans (S&Ls)

Savings banks (SBs) appeared in the 1980

•Specialize in long-term residential mortgages, which are
usually financed with short-term deposits of small
savers
•Faced a huge crisis during the 1982-1992 period that

saw over half of all SIs fail

 The S&L Crisis of 1982-1992

• Some 4,000 SIs existed at the end of the 1970s

• By 2007, only 1,257 SIs exist
• The Federal Reserve radically changed its
monetary policy during October 1979 to October
1982
– targeted reserves rather than interest rates
– led to sudden surge in interest rates
– many SIs faced negative spreads
– SIs lost depositors because of Regulation Q
 The S&L Crisis of 1982-1992

• Depository Institutions Deregulations and Monetary

Control Act (DIDMCA) of 1980 and Garn-St. Germain
Depository Institutions Act (GSGDIA) of 1982 addressed
the crisis
– allowed interest-bearing transaction accounts
– allowed SIs to offer floating- or adjustable-rate mortgages
– allowed expansion into real estate development and
commercial lending
– some SIs chose to invest in the junk bond market and suffered
large losses when the junk bond market collapsed in the mid-
1980s
Cont…..

• Real estate and land prices collapsed in many areas of the

U.S. in the mid-1980s
– many mortgages defaulted as a result
• The Federal Savings and Loan Insurance Corporation
(FSLIC) had a policy of regulatory forbearance
– i.e., its policy was to not close economically insolvent FIs,
allowing them to continue to operate
• 1,248 SIs failed in the 1982 to 1992 period
– the FSLIC became massively insolvent as a result
Cont..

• The Financial Institutions Reform, Recovery, and

Enforcement Act (FIRREA) of 1989
– abolished the FSLIC
– created a new Savings Association Insurance Fund (SAIF) that
was put under the management of the Federal Deposit
Insurance Corporation (FDIC)
– replaced the Federal Home Loan Bank Board with the Office of
Thrift Supervision (OTS)
– created the Resolution Trust Corporation (RTC) to close and
liquidate insolvent SIs
– the Qualified Thrift Lender Test (QTL) sets a floor on the
mortgage-related assets that thrifts must hold (currently at 65%)
– introduced Prompt Corrective Action (PCA), which mandates
that regulators must close problem banks and thrifts faster