The Savings and Loan crisis of the late 1980s is discussed in the book – a bit.

Question

The Savings and Loan crisis of the late 1980s is discussed in the book – a bit. 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 crisis. How? The Financial Institutions Reform, Recovery, & Enforcement Act of 1989 (FIRREA) was passed in response to the crisis. What effect did FIRREA have on the prior regulations? Are there any similarities between the S&L crisis and the latest financial crisis?

Explanation / Answer

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Garn-St. Germain Depository Institutions Act of 1982 (GSGDIA) allowed lenders to exceed state interest rate caps allowing the high cost deposits which was a major catalyst for the crisis and increasing deposit insurance coverage from 40000 to 100000 allowed more depositors to lend to S&Ls(Savings and Loans Association) which increased their deposits and investment powers.This allowed the S&Ls to lend to even riskier projects (real estate and commercial lending) with their large deposits,this allowed them to lend to more and more riskier projects to earn higher profits.The failure of riskier projects to repay the loan to them created large losses for S&Ls which resulted in the crisis.

Financial Institutions Reform, Recovery, & Enforcement Act of 1989 (FIRREA) strengthened the capital requirements of savings associations and constrained their non mortgage related investment powers and set a floor on the mortgage related assets that a S&L can hold.The act created the Resolution trust corporation(RTC) to resolute and close the most insolvent savings institutions. The act also abolished FSLIC and created a new saving association insurance fund under management of FDIC.

Yes there are similarities between these crisis of which one is that the allowance for adjusting interest rate to higher levels to allow sub prime lending in credit crisis and taking in deposits in S&L crisis both were a important factor in the crisis.The higher subprime lending at higher interest rate created the credit crisis while higher interest allowed S&Ls to take in more deposits which resulted of them lending more and more for riskier projects which when failed to repay resulted in the crisis.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.