Savings And Loan Crisis

The Savings and Loan Crisis: The defining features, the resultant deregulation, and its influence on the financial policy making.

The U.S. economy's trajectory sketching the emergence of bank failures to the Savings and Loan crisis of the 1980s is attributable to the transformation of the U.S. financial system from being the one with a high degree of regulation to the one with huge deregulation. This process portrays the consequences that led to the crisis and further aggravated it. The magnitude of the crisis gave the U.S. economy a window to reform its banking industry post the crisis. The paper here traces the regulatory legislative framework in the U.S. before the crisis and how its transformation, overtime, accentuated the severity of

The restrictions were further reduced in 1987, when various banks were allowed to participate in underwriting businesses and handle commercial paper, mortgage-backed securities, municipal bonds, etc. Banks were also allowed to deal in certain debt and equity securities within the limits specified. Later in 1996, the Federal Reserve allowed bank holding companies to own investment banking operations equivalent to as much as 25 percent of their revenues. This ruling left the Glass-Steagall Act completely obsolete and ineffective and the final blow to the Act came in 1999 when the Financial Modernization Act, also called the Gramm-Leach-Bliley Act was

An important change was the replacement of the FSLIC by the Savings and Association Insurance Fund(SAIF) and the formation of the Bank Insurance Fund(BIF). Also created were the FSLIC Resolution Fund and the Resolution Trust Corporation, which were to be managed by the FDIC alone. All this was done to help the insolvent institutions. The Act also abolished the Federal Home Loan Bank Board(FHLBB) and a new regulator , the Office of Thrift Supervision(OTS) was created to overlook the thrift industry. FIRREA also imposed stricter accounting and other standards on thrifts: thrift capital standards were required to be at least as stringent as those for national banks; thrifts were required to adhere to national-bank limits on loans to one borrower and on transactions with affiliates; limits were imposed on the activities of state-chartered thrifts; the use of brokered deposits was restricted; and investments in junk bonds were prohibited (Annual Review of Banking Law 9, 1990). Certain cross-guarantee provisions were also put in place. Enforcement by regulators was made stricter and powers given to terminate those institutions that did not maintain the required capital