The Savings & Loans Crisis Of The 1980s

1928 Words8 Pages
The Savings & Loans crisis of the 1980s produced the biggest collapse of US financial institutions since the Great Depression. It emerged due to volatile interest rate climate in late 1970s when depositors withdrew from these S&L institutions in large number and put them in money market funds where they could get higher returns as these money market funds were not under the purview of Regulation Q which restricted the interest these S&Ls could offer to their depositors. 1) How did the crisis begin? The business of the S&L industry was based on the unstable principle of borrowing short and lending long, so they accepted short-term deposits ie their liabilities…show more content…
This recapitalization bill was used as a bargaining chip against the Bank Board which had become more rigorous in dealing with these insolvent thrifts. So, recapitalization was postponed and eventually when it was done, it was too little and already too late. Too little because although they allowed recapitalisation but along with that, they put a forbearance clause which precluded the regulators from hastily closing these insolvent firms. And as we know it was this delayed closure of these failed firms which actually inflated the S&L crisis. So, the reluctance of congress to confront the real size of the crisis and leniency towards the politically influential thrifts prevented decisive measures from being taken even after the identification of the problem. The FSLIC recapitalisation bill of 1987 had provision for just around $11 billion when the need was probably around $40 billion at that time. Later in 1989, Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was enacted, in fits and starts, to complete the
Open Document