The S&L debacle: public policy lessons for bank and thrift regulation
Many Americans have viewed the S&L crisis as the ultimate example of greed's pervasiveness in our society. Yet the personalities that have dominated the news have obscured the real issues behind the worst debacle in our nation's financial history.
Surveying the modern course of the thrift industry, from the Federal Home Loan Bank Act of 1932 to the current efforts at restructuring, Lawrence J. White addresses the essential questions of the S&L crisis: what happened, how it happened, why it happened, and what must be done so that it never happens again. White, who from November 1986 to August 1989 was a Board Member of the Federal Home Loan Bank Board--the government agency that regulated S&Ls and insured their deposits through the FSLIC--combines his knowledge as an insider with the insights of an economist to bring a much-needed fresh perspective on the S&L mess. He shows that, rather than the result of widespread fraud, the crisis was rooted in the highly unusual economic conditions of the early 1980s, poorly thought-out deregulatory policies, and flawed accounting practices.
The S&L Debacle reveals that the banking system of the late 1970s was anachronistic. Tightly regulated thrifts were locked into portfolios of long-term mortgages and limited in the interest rates that they could pay to depositors. When interest rates soared, the thrifts experienced heavy losses. Clearly, adjustment in the industry was necessary, and the economic deregulatory policies implemented in the early 1980s were long overdue. But White points out that these policies should have been accompanied by strengthened safety-and-soundness regulations. Instead, safety-and-soundness rules were also deregulated, bringing a deadly combination of opportunities, capabilities, and incentives for risk-taking that spelled disaster for hundreds of thrifts--and ultimately for the FSLIC insurance fund and the U.S. taxpayer.
White offers far-reaching recommendations for reform, such as better methods of gathering information about thrifts before they become insolvent, risk-related net worth requirements, risk-based insurance premiums--so that deposit insurance is treated more like other forms of insurance--and stronger powers of early intervention by regulators.
With its comprehensive overview, incisive analysis, and clear, nontechnical language, this book is important reading for anyone hoping to understand the S&L crisis and will be an essential guide for economists and policymakers of the future.
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Three The Regulatory Framework and the Importance
Prelude Deregulation and the Debacle
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acquirers actions agencies amount Assets billions balance sheet Bank Board bank or thrift banks and thrifts Benston borrowing cash Chapter cleanup commercial banks Congress coverage debacle deposit insurance depositors depository institutions deregulation direct equity early economic FDIC Federal Home Loan federally chartered FHLBs FIRREA Freddie Mac FSLIC FSLIC-Insured Thrifts future GAAP Ginnie Mae growth healthy thrifts holding companies Home Loan Bank hundreds of thrifts incentives income increase insolvent thrifts insurance funds insurance premiums insured deposits interest rate risk liabilities limited liquidation loans and investments managers market value accounting mortgage loans mortgage-backed securities operating losses owners payments percent placement portfolios problems profits protection real estate reduce Regulation Q regulatory residential mortgage risk-based risk-taking RTC's safety-and-soundness regulation securitization solvent state-chartered thrifts subordinated debt Table tangible net worth Texas thrifts thrift industry thrift regulation thrift's assets transactions Treasury worth levels worth requirements worth standards