Asked Nov 19, 2019

8b. Explain how the deregulation of the savings & loan industry in the 1980s affected the viability of S&Ls.



Expert Answer

Step 1

The 1960s witnessed the rising inflation and the higher interest rates in the economy. As a result of these factors, the returns from the existing portfolios which were focused on the fixed rate mortgages faced the funding problem as the interest payments due to the depositors creped above the returns from the existing portfolios. The thrift industry profitability eroded as a result of this issue and the regulations in the economy prevented the industry from diversifying the portfolio of the federally insured savings and loans. As the interest rates went above the statutory interest rate ceilings, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) came into existence in the 1980.

Step 2

The DIDMCA is the deregulation that the savings and loan industry faced in the 1980 which phased out the regulations that the savings and loans industry had previously. Thrifts were permitted to diversify the asset portfolios and this lead the way to the inclusion of the consumer loans other than the mortgage loans for which they were permitted. But the deregulation was a late comer as the interest rates in the economy already sta...

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