The Banking and Savings and Loan (S&L) crisis of the 1980s and early 1990s was a period of financial turmoil in the United States that saw over 1,600 banks and 1,000 S&Ls fail, leading to a bailout of over $125 billion. The crisis had a significant impact on the US economy and led to increased regulation and oversight of the financial industry.
Causes of the Crisis
The banking crisis was caused by a combination of factors, including deregulation, significant interest rate risk, a volatile real estate market, risky loans, fraud, and mismanagement. Deregulation allowed some banks to take on riskier investments and loans, and they became heavily invested in the real estate market. Some banks engaged in risky loans, such as lending money to individuals who did not have the creditworthiness to pay back their loans. Additionally, a few banks and S&Ls engaged in fraudulent activities, and their executives engaged in mismanagement, including making risky loans and investments and paying themselves large salaries and bonuses.
The S&L crisis was also caused by a combination of factors, including deregulation, interest rate risk, fraud, and mismanagement. Deregulation of the S&L industry allowed them to take on riskier investments such as junk bonds and loans, and many S&Ls had a large portfolio of long-term, fixed-rate mortgages. When interest rates rose sharply in the early 1980s, these mortgages became unprofitable, and many S&Ls were unable to meet their obligations.
Government Intervention
The federal government played a role in the crisis by insuring bank and S&L deposits up to a certain amount, which led to moral hazard. Banks and S&Ls knew that if they took on too much risk and failed, the government would bail them out. This led to an increase in risky behavior and ultimately contributed to the crisis.
Impact of the Crisis
The banking and S&L crisis had a significant impact on the US economy. The government had to spend over $125 billion to bail out failed banks and S&Ls, leading to a large increase in the national debt. Some Americans lost their savings or investment when their banks and S&Ls failed, leading to a decrease in consumer confidence and spending. The crisis also led to increased scrutiny of the financial industry, which eventually led to further regulation and oversight.
The Resolution Trust Corporation
To address the S&L crisis, the federal government established the Resolution Trust Corporation (RTC) in 1989. The RTC was tasked with managing the assets and liabilities of failed S&Ls, resolving claims against these institutions, and selling their assets to repay depositors and creditors. The RTC was successful in recovering a significant portion of the taxpayers' money that had been used to bail out the S&L industry.
Conclusion
In conclusion, the banking and S&L crisis of the 1980s and early 1990s was caused by a combination of factors, including deregulation, interest rate risk, a volatile real estate market, risky loans, fraud, and mismanagement. Its impact on the US economy was significant and led to increased regulation and oversight of the financial industry. The crisis ultimately led to the establishment of the RTC, which was successful in recovering a significant portion of the taxpayers' money that had been used to bail out the S&L industry.
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Source: An Examination of the Banking Crises of the 1980s and Early 1990s www.FDIC.gov