Savings and Loan Crisis

In: Business and Management

Submitted By tara198421
Words 1113
Pages 5
What was the Savings and Loans crisis? What caused it? Could the crisis have been prevented? How?

The savings and loan crisis was the greatest banking collapse since the great depression. Emerging in the 1970’s and escalating during the 1980’s, by 1989 over half of the United States savings and loan associations along with the Federal Savings and Loan Insurance Corporation fund that was created to insure their deposits had collapsed. The overwhelming cost of the savings and loan crisis still astounds many taxpayers, depositors, and policymakers today. This savings and loan experience produced three valuable lessons: excessive regulation was the initial cause of the industry's problems; federal deposit insurance was ultimately responsible for the high costs of this crisis; government sponsored efforts to protect the industry only invited abuses and increased the ultimate cost of restructuring (England).
The foremost cause of the saving and loan crisis was the high inflation levels that occurred during the 1970’s. Savings and loan institutions depended on residential mortgages for income. During the 1970’s these institutions began losing money on fixed rate loans because the interest rates set were created in previous years when interest rates were well under the rate of inflation. Congress subsequently decided to allow the savings and loans to diversify into riskier and more profitable commercial real estate and relaxed lending requirements to prevent the savings and loans from collapsing. This change in the law relaxed restrictions and accounts for about 50 billion of the savings and loan bill (Ely).
The following are policy decisions which greatly affected the savings and loan crisis:
• Lending requirements were relaxed.
• Deposit Insurance rose from 40,000 to 100,000.
• Enforcement of the law by banking regulators decreased.
• Interferences in…...

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