From prosperity to bailout: the banking crisis of the 1980s

The 2007-2008 financial crisis is considered the worst since the wave of bank failures in the Great Depression. But another banking crisis that occurred in the 1980s and early 1990s was listed as one of the worst global credit disasters in history. Amid the noise of the credit bubble burst in 2008, the often overlooked Savings and Loan Crisis (S&L) eventually led to a large-scale taxpayer-funded bailout, and the industry has basically collapsed.

Although smaller in scale than the banking crises of the 1920s and 1930s, the savings and loan crises pushed state and federal supervision and deposit banking insurance systems to their limits, ultimately leading to extensive changes in the regulatory environment. These events may surprise anyone who is too young to remember. Learn more about the crisis, including the root cause, remedial measures taken, and the overall cost to taxpayers.

Key points

  • According to data from the Federal Deposit Insurance Corporation, between 1980 and 1994, 1,617 commercial banks and savings banks failed.
  • In the 1980s and early 1990s, there was no single factor that led to a surge in bank failures.
  • Due to the savings and loan crisis, many institutions and institutions were created
  • According to estimates by the US Chief Accounting Firm, the cost of this crisis is $160.1 billion.

Increase in bank failures in the early 1980s

According to data from the Federal Deposit Insurance Corporation (FDIC) Department of Research and Statistics, between 1980 and 1994, 1,617 commercial banks and savings banks failed. These failed institutions held approximately US$206.2 billion in assets.

In another study using FDIC data, between 1986 and 1995, 1,043 savings banks (mainly deposit-taking and mortgage lending institutions) closed down or resolved in other ways. The total assets of these institutions are US$519 billion. Therefore, the banking crisis of the 1980s was a two-headed beast, one was related to the failure of the savings and loan crisis—it represented most of the bank’s assets and numbers—and the other was related to the failure of large commercial banks. Bank. Comparing this with data on bank failures before the 1980s, the severity of the crisis becomes obvious. For example, from 1965 to 1979, only 0.3% of all existing banks failed.

Bank failures eventually reached 279 times after the Great Depression in 1988. As the crisis deepened throughout the 1980s, nominal assets reached 54 billion U.S. dollars. Although it was relatively small in terms of the total number of banks and bank assets-and taking into account the final cost-it caused the FDIC’s first operating loss. These losses continued until the end of 1991.

Factors leading to the crisis

In the 1980s and early 1990s, the factors that led to the surge of bank failures in the United States were not single. Before the crisis broke out, the legislative and regulatory environment was changing:

Changes in the regulatory and economic environment triggered unrestricted real estate loans that began in the late 1970s and continued through the early 1980s. Many analysts believe that this was the main reason for the banking crisis at that time. The severe economic recession in the early 1980s and early 1990s, as well as the sharp fall in real estate and energy prices during this period, were both the result and key contributing factors of the increasingly unstable financial environment. Fraud—mainly robbery or control fraud—and other types of insider misconduct also played an important role in the overall crisis.

From the late 1970s to the early 1980s, changes in the regulatory and economic environment led to unrestricted real estate loans.

Government intervention to solve the problem

Although government intervention in the banking industry is considered to be one of the main contributors to the financial crisis of the 1980s, subsequent actions taken by the government also helped rescue and rebuild the banking industry, even if it was fundamentally changed. As the savings and loan crisis worsened in the late 1980s, it led to a series of regulatory and legislative changes, and a series of institutions and institutions were created.

Congress also promulgated the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA)—taxpayers began to pay for it—in response to the deepening crisis. This replaces the Federal Savings and Loan Insurance Corporation (FSLIC) and allows the assets, liabilities, and business of the failed FSLIC to be transferred to the newly established FSLIC Resolution Fund (FRF), which is funded by the government’s Federal Deposit Insurance Corporation (Federal Deposit Insurance Corporation). Corporation) operations. Federal Deposit Insurance Corporation).

Ironically, the current Republican presidents took actions that contradicted their free market speech during the savings and loan crisis and the 2008 subprime mortgage crisis, mainly in the form of large-scale government bailouts of bankrupt financial institutions.

Social cost and taxpayer burden

The Office of the Chief Accountant of the United States estimated that the cost of the crisis was US$160.1 billion—of which US$124.6 billion was paid by the US government between 1986 and 1996. These figures do not include funds from state aid or savings insurance funds. Most of the money is paid to depositors as compensation for the money squeezed by insiders. The National Commission for Reform, Recovery and Enforcement of Financial Institutions (NCFIRRE) pointed out that “evidence of fraud is always present, as does the ability of operators to’milk’ through high dividends and salaries, bonuses, allowances and benefits. Other methods are typical. The big failure was that management took advantage of almost all improper incentives created by government policies.”

Bottom line

The banking crisis of the 1980s was essentially a crisis of savings institutions, and the failure of some large commercial banks was also involved. The rapidly changing banking regulatory environment, increasing competitive pressure, savers’ speculation on real estate and other assets, and unstable economic conditions are the main reasons and aspects of this crisis. The resulting banking industry pattern is an unprecedented pattern of banking industry concentration.

Although the number of FDIC banks dropped from 14,392 to 7,511 between 1984 and 2004, by 2005, the proportion of banking assets held by the 10 largest banks rose sharply to nearly 60%. The bill passed in 1999 removed the remaining legal barriers and allowed commercial banks, investment banks, and insurance giants to merge and operate under one corporate tent.


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