Savings and loan crisis

from Wikipedia, the free encyclopedia

The Savings and Loan Crisis (English Savings and Loan Crisis ) was a banking crisis in the 1980s in the United States .

Over 1,000 Savings and Loans savings banks in the US collapsed as part of the crisis. The total damage amounted to over 150 billion US dollars , of which 125 billion was raised by the public sector. The damage contributed to the US's high budget deficits in the 1980s and the subsequent recession in the US economy.

background

Savings and loan associations, or S & Ls for short , had existed in the USA since the beginning of the 19th century . As mostly municipal companies, they were subject to strict regulatory requirements until the early 1970s . This went so far that even the maximum amount of investment interest was prescribed.

After the inflation rate and with it interest rates rose significantly in the 1970s, the savings banks lost extensive deposits in money market funds that promised significantly higher interest rates.

On the other hand, the savings banks had set up extensive fixed-rate loans for mortgage lending , which led to losses due to rising interest rates. The savings banks' profits and equity were eroding.

The roots of strict regulation lay in the era of the Great Depression . In view of the banking crisis at the time, savings banks were only allowed a few business areas. The separate banking system also contributed to limiting business opportunities.

At the end of President Jimmy Carter's term in office , the limits were gradually lifted. Furthermore, the adhesion of the American was deposit insurance ( Federal Deposit Insurance Corporation , FDIC) increased from 70 percent of the balance to 100 percent. When Ronald Reagan took office as president in 1981 , 3,300 of 3,800 savings banks were in the red.

1982 therefore was amended by Congress of the yarn-St. Germain Depository Institutions Act passed, a federal act that should enable the savings banks to become competitive again. Regulation has been relaxed. Savings banks were allowed to installment loans forgiven and corporate loans and credit cards to spend and were from the restrictions of interest rates freed. Furthermore, they were allowed to work in the real estate business. Only investment banking was denied them.

The crisis

Due to the deregulation, the savings banks expanded at a rapid pace. Lending for real estate loans increased significantly. As real estate prices rose at the same time, risk costs also fell. With confidence in the government guarantees, the acquisition of the investment funds necessary for refinancing was no longer a problem. These guarantees also increased the incentive to do riskier business: This enabled the savings banks to make higher profits, but the losses were limited by the FDIC (see: Moral Hazard ).

In addition to the lending business, the savings banks operated high-risk corporate financing. They were among the most important investors in junk bonds , that is, high-risk corporate bonds. Conversely, the savings banks sold large parts of their financing via loan securitization.

With the fall in inflation (and interest rates) and the fall in real estate prices in the mid-1980s, the business model of the savings banks collapsed (problem of maturity transformation ). The savings banks were hit hard by the losses from real estate loans and speculative losses. By securitizing the loans, however, the savings banks hardly benefited from the fall in interest rates. On the contrary: the refinancing options were made more difficult by the low interest rates.

In addition, in some cases bank boards and managers had fraudulently carried out financial transactions.

Initially, it was the policy of the FHL banks and the FDIC not to allow bankruptcies and to avoid a banking crisis by providing support. But this policy could not be sustained. In March 1985, the Home State Savings Bank of Cincinnati, Ohio went bankrupt. As a result, more and more savings banks collapsed, the investors were largely compensated by the FDIC.

Legislative reactions

With the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), Congress regulated the liquidation of the bankrupt savings banks. One of the most important parts of that law was the creation of the Resolution Trust Corporation (RTC). These were state institutions that were created for a limited period in order to organize, according to the law, “the maintenance, restructuring and reform of financial institutions” (see Bad Bank ). Thus they took on “bad” loans that were not reliably serviced by the creditors. After seven years, the crisis was largely over and the RTC was absorbed into the FDIC ( Federal Deposit Insurance Corporation ).

The state granted the banks a loan of 400 billion US dollars , of which 124 billion were not finally repaid. The taxpayer was charged a total of approximately $ 124 billion through 1999.

A central figure was the businessman Charles H. Keating , who was sued for $ 1.1 billion and sentenced to twelve years in prison in 1993 (see also Keating Five ).

literature

  • Steven Pizzo, Mary Fricker, Paul Muolo: Inside Job. ISBN 0-07-050230-7 .
  • Lawrence White: The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation.
  • Michael Lowy: High Rollers: Inside the Savings and Loan Debacle.
  • Martin Tolchin: Legal Scholars Clash Over Neil Bush Actions. In: The New York Times , September 27, 1990.
  • US Supreme Court judgment, United States v. Winstar Corp. , Docket 518 US 839 (1996). Provides a concise and precise overview of the timing and accounting practice that exacerbated the crisis

Web links

Individual evidence

  1. ↑ Frank Westermann from the University of Osnabrück in an interview with the FAZ : "Everyone knew about it", October 23, 2008
  2. ↑ Timothy Curry, Lynn Shibut: The Cost of the Savings and Loan Crisis: Truth and Consequences . ( Memento of the original from October 29, 2008 in the Internet Archive ; PDF; 80 kB) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. Federal Deposit Insurance Corporation , December 2000. @1@ 2Template: Webachiv / IABot / www.fdic.gov
  3. ↑ Charles Keating, 90, Key Figure in '80s Savings and Loan Crisis, Dies . The New York Times , April 2, 2014; accessed on March 12, 2018