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Concept
Savings and loan crisis
Summary
The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of 32% (1,043 of the 3,234) of savings and loan associations (S&Ls) in the United States from 1986 to 1995. An S&L or "thrift" is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members (a cooperative venture known in the United Kingdom as a building society).
The Federal Savings and Loan Insurance Corporation (FSLIC) closed or otherwise resolved 296 institutions from 1986 to 1989, whereupon the newly established Resolution Trust Corporation (RTC) took up these responsibilities. The RTC closed or otherwise resolved 747 institutions from 1989 to 1995 with an estimated book value between 407 billion. In 1996, the General Accounting Office (GAO) estimated the total cost to be 132.1 billion taken from taxpayers.
Starting in October 1979, the Federal Reserve of the United States raised the discount rate that it charged its member banks from 9.5 percent to 12 percent in an effort to reduce inflation. At that time, S&Ls had issued long-term loans at fixed interest rates that were lower than the newly mandated interest rate at which they could borrow. When interest rates at which they could borrow increased, the S&Ls could not attract adequate capital from deposits and savings accounts of members for instance. Attempts to attract more deposits by offering higher interest rates led to liabilities that could not be covered by the lower interest rates at which they had loaned money. The end result was that about one third of S&Ls became insolvent.
When the problem became apparent, after the Federal Reserve increased interest rates, some S&Ls took advantage of lax regulatory oversight to pursue highly speculative investment strategies. This had the effect of extending the period where some S&Ls were likely technically insolvent. These actions also substantially increased the economic losses for many S&Ls than would otherwise have been realized had their insolvency been dealt with earlier.
Official source
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