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    Review of The Case Study: The Savings and Loan Crisis

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    Prantik Mitra
    The document reviews the savings and loan crisis of the 1980s. It discusses the creation of savings and loans to help Americans buy homes. Deregulation by regulators in the 1980s led to over-concentration and risky lending practices, resulting in a crisis. The Federal Savings and Loan Insurance Corporation insured thousands of savings and loans but its deregulation contributed to high inflation. President Reagan's Garn-St. Germain Act allowed savings and loans to make risky loans with insured deposits, further worsening problems. Ultimately, over-regulation and deregulation disrupted the balance needed in the industry.

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    Review of The Case Study: The Savings and Loan Crisis

    Uploaded by

    Prantik Mitra
    73 views3 pages
    The document reviews the savings and loan crisis of the 1980s. It discusses the creation of savings and loans to help Americans buy homes. Deregulation by regulators in the 1980s led to over-concentration and risky lending practices, resulting in a crisis. The Federal Savings and Loan Insurance Corporation insured thousands of savings and loans but its deregulation contributed to high inflation. President Reagan's Garn-St. Germain Act allowed savings and loans to make risky loans with insured deposits, further worsening problems. Ultimately, over-regulation and deregulation disrupted the balance needed in the industry.

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    MScFE CRT M2

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    CRT M2

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    The document reviews the savings and loan crisis of the 1980s. It discusses the creation of savings and loans to help Americans buy homes. Deregulation by regulators in the 1980s led to over-concentration and risky lending practices, resulting in a crisis. The Federal Savings and Loan Insurance Corporation insured thousands of savings and loans but its deregulation contributed to high inflation. President Reagan's Garn-St. Germain Act allowed savings and loans to make risky loans with insured deposits, further worsening problems. Ultimately, over-regulation and deregulation disrupted the balance needed in the industry.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    73 views3 pages

    Review of The Case Study: The Savings and Loan Crisis

    Uploaded by

    Prantik Mitra
    The document reviews the savings and loan crisis of the 1980s. It discusses the creation of savings and loans to help Americans buy homes. Deregulation by regulators in the 1980s led to over-concentration and risky lending practices, resulting in a crisis. The Federal Savings and Loan Insurance Corporation insured thousands of savings and loans but its deregulation contributed to high inflation. President Reagan's Garn-St. Germain Act allowed savings and loans to make risky loans with insured deposits, further worsening problems. Ultimately, over-regulation and deregulation disrupted the balance needed in the industry.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 3

    Review of the Case Study: The Savings and Loan Crisis

    Introduction

    Creation of Savings and Loan (S&Ls) industries started in 1932. The industry aimed to help

    the working class in the US to acquire a self-owned home. In 1980s, the industries suffered

    series of crisis due to the over-regulation and deregulation by the regulators. A new

    regulatory body was later created to fix the mess which closed many S&Ls.

    Role players from the inception to the demise of the Savings and Loan Market

    The direct and indirect role players from the inception to the demise of the Savings and Loan

    Market were:

    1. The Federal Home Loan Bank Board which was the creator of Savings and Loan

    industries in 1932.

    2. The Federal Savings and Loan Insurance Corporation (FSLIC) which was responsible for

    insuring the Savings and Loan Industries created in 1934. The FSLIC insured 4,000

    Savings and Loans industries with $604 billion within the period of her creation to 1980.

    3. State Sponsored Insurance Programs through FSLIC insured 590 Savings and Loans

    Industries with $12.2 billion assets.

    4. The Federal Reserve with responsibility of managing inflation.

    5. The Resolution Trust Corporation (RTC) was founded in late 1980s to restore the lost

    glory of the Savings and Loan Industries.

    Shortfalls of the regulation which affected the Savings and Loan Market

    1. Deregulation by The Federal Savings and Loan Insurance Corporation (FSLIC): Greater

    concentration of Savings and Loan Industries due to deregulation by the FSLIC which

    insured too many Savings and Loan Industries; 4,000 S&Ls directly and 590 S&Ls
    indirectly through State-sponsored insurance programs led to high inflation which was a

    major S&Ls crisis.

    2. Increment of Interest rate by The Federal Reserve: Increasing the interest rate by the

    Federal Reserve with the aim to end double-digit inflation created an unfavourable

    interest return for the savers which prompted them to withdraw their savings from S&L

    industries and invests in banks with favourable interest returns. The regulation was over-

    regulation and a major shortfall which caused another major S&Ls crisis.

    3. Elimination of the interest rate cap: The Garn-St.Germain Depository Institutions Act

    signed by President Reagan was a deregulatory law which allowed the Savings and Loan

    industries to make use of the federally-insured deposits to make highly risky loan. The

    loose regulatory response led to vital financial problems for many Savings and Loan

    industries.

    Level of regulation of the Garn-St.Germain Depository Institutions Act

     Domestic

    The Garn-St.Germain Depository Institutions Act applied to a specific country, US.

    Hence, it was at the Domestic level of regulation.

     Governmental

    Implementation of the Garn-St.Germain Depository Institutions Act was made by the

    President Reagan of the US which makes it to be at the Governmental level.

     Industry-specific

    The regulation was to address a specific issue (interest rate) within a particular sector

    (Savings and Loan Industries). Therefore, the regulation was at industry-specific level.

     Direct

    The Garn-St.Germain Depository Institutions Act was a regulation directed to a particular


    industry (Savings and Loan) with the aim of reviving the industry from crisis. Hence, it

    was at the direct level of regulation.

    Conclusion

    Over-regulation and deregulation can cause a major crisis in any financial industry as it did to

    the Savings and Loan Industries in the 1980s. it is therefore a necessity for regulators to

    strike a balance between stringently and loosely regulations and ensure constant and

    continuous modification.

    Sources

    Kenneth J., Savings and Loan Crisis, www.federalreservehistory.org

    “The S&L Crisis: A Chrono-Bibliography,” FDIC.gov

    “The Savings and Loan Crisis and its Relationship in Banking,” FDIC.gov

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