Savings and loan crisis

Definition

The savings and loan crisis refers to a financial disaster that occurred in the United States during the 1980s and early 1990s, where numerous savings and loan associations failed due to poor investments, risky loans, and deregulation. This crisis led to the collapse of over 1,000 savings and loan institutions, costing taxpayers billions in bailouts and prompting significant changes in banking regulations and oversight.

5 Must Know Facts For Your Next Test

1. The savings and loan crisis was largely fueled by deregulation that allowed institutions to engage in high-risk investments without sufficient oversight.
2. By 1995, the cost of the savings and loan crisis to taxpayers was estimated to exceed $124 billion, largely due to federal bailouts of failed institutions.
3. The crisis led to a significant consolidation in the banking industry, resulting in a decrease in the number of savings and loan associations from over 3,000 in the 1980s to just a few hundred by the 1990s.
4. The RTC was established to manage and liquidate assets of failed savings and loan associations, ultimately selling off properties and repaying creditors.
5. The FIRREA act imposed stricter regulations on savings and loan institutions to prevent future crises, including higher capital requirements and enhanced oversight.

Review Questions

• How did deregulation contribute to the savings and loan crisis, and what were some key outcomes of this relationship?
  • Deregulation allowed savings and loan institutions to engage in riskier lending practices without adequate oversight, leading to poor investment decisions. Many institutions invested heavily in commercial real estate and junk bonds, which ultimately resulted in massive losses. The outcome was a significant number of failures among these institutions, costing taxpayers billions for bailouts while prompting regulatory reforms aimed at preventing similar crises in the future.
• Discuss the role of the Resolution Trust Corporation in addressing the aftermath of the savings and loan crisis.
  • The Resolution Trust Corporation played a critical role in managing the assets of failed savings and loan institutions following the crisis. Established by Congress, it worked to liquidate properties, repay creditors, and oversee the resolution of distressed assets. By handling these issues, the RTC helped stabilize the banking sector while paving the way for reforms that improved regulatory oversight for financial institutions.
• Evaluate how the lessons learned from the savings and loan crisis have shaped contemporary banking regulations and practices.
  • The lessons learned from the savings and loan crisis led to substantial changes in banking regulations aimed at ensuring greater financial stability. Legislative measures like FIRREA introduced stricter capital requirements for thrift institutions while increasing regulatory oversight. These reforms were instrumental in reshaping how banks operate today, fostering more responsible lending practices, enhancing consumer protection, and preventing a repeat of such widespread failures in financial institutions.

Related terms

Deregulation: The process of removing government restrictions and regulations from an industry, which, in the context of the savings and loan crisis, contributed to risky lending practices.

Resolution Trust Corporation (RTC): A government-owned asset management company created to handle the assets of failed savings and loan institutions during the crisis.

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA): A law enacted in 1989 to address the savings and loan crisis by reforming regulation and oversight of thrift institutions.