Savings & Loan Crisis of the
1980s
Kaitlin Hunter
Causes Pre-1980s

Borrowing short to lend long
◦ Fixed rate mortgages
 Increasing interest rates
◦ Negative spreads
Causes Pre-1980s

Regulation Q
◦ Extended to S&Ls in 1966
◦ Limited interest paid on deposits
◦ Phased out in 1980 by DIDMCA
 Rapid growth risky investments could be pursued

Federal deposit insurance
◦ All S&Ls charged same premium
Problems in the 1980s

Trigger events
◦ Oil prices doubled increasing inflation
◦ Growth of money supply restricted

Deregulation
◦ Tried to offset the damage of fixed-rate
mortgages
◦ Expanded assets
Problems in the 1980s

Percent of S&L assets in mortgages
Problems in the 1980s

Regulatory forbearance
◦ Allowed badly managed insolvent S&Ls to
continue operating
◦ FHLBB attempted to hide insolvent S&Ls
 Not enough money in insurance fund
 Wanted to escape blame & protect careers
◦ Eliminated maximum limits on loan-to-value
ratios in 1983
◦ Permitted excessive lending to one borrower
 Leads to principal/agent problems
Lincoln Savings & Loan Scandal

Charles Keating
◦ 1984 acquired Lincoln Saving & Loan
◦ Pursued high risk investments
◦ Exceeded 10% equity investment limit by
$600 M
◦ Accused examiners of bias
◦ Keating Five
◦ Failed in 1989
Bailout


1989 George W. Bush inaugurated
Congress passed the Financial Institutions
Reform Recovery & Enforcement Act
(FIRREA)
◦ Abolished FHLBB
◦ Shifted regulation to the Office of Thrift
Supervision (OTS)
◦ Transferred deposit insurance from FSLIC to
FDIC
◦ Reinstituted regulatory provisions
◦ Created Resolution Trust Corporation (RTC)
Economic Effect
What to takeaway from S&L
Crisis…

Regulation
◦ Created initial competitive advantage
◦ Forced into risky strategies to survive

Need proactive approach to regulation
Sources
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2)
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4)
5)
Acharya,Viral V., Thomas Cooley, Matthew Richardson, and Ingo Walter. "MARKET
FAILURES AND REGULATORY FAILURES: LESSONS FROM PAST AND PRESENT
FINANCIAL CRISES." Stern School of Business, 5 Dec. 2005.Web. 10 Apr. 2011.
<http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/market_failures.pdf>.
"Appendix 1 to Chapter 11: The Savings and Loan Crisis and Its Aftermath." 44-51. Web.
10 Apr. 2011.
<http://wps.aw.com/wps/media/objects/7529/7710171/appendixes/ch11apx1.pdf>.
Bert Ely, "Savings and Loan Crisis." The Concise Encyclopedia of Economics. 2008. Library of
Economics and Liberty. 10 April 2011.
<http://www.econlib.org/library/Enc/SavingsandLoanCrisis.html>.
Moysich, Alane. "Chapter 4. The Savings and Loan Crisis and Its Relationship to Banking."
History of the Eighties- Lessons for the Future. N.p.: n.p., n.d. 167-88. FDIC. Web. 10 Apr. 2011.
<http://www.fdic.gov/bank/historical/history/167_188.pdf>.
Nash, Nathaniel. "Collapse of Lincoln Savings Leaves Scars for Rich, Poor and the Faithful."
The New York Times 30 Nov. 1989: n. pag. The New York Times. Web. 10 Apr. 2011.
<http://query.nytimes.com/gst/fullpage.html?res=950DE1D81131F933A05752C1A96F948
260>.
Questions