How did government deregulation affect savings and loans banks?

1 Answer
Jan 20, 2017

In the 1980s and 1990s there was large changes in how S&Ls could operate. There were many S&L failures. They had to adapt or Die.

Explanation:

The "Thrifts" were tightly regulated Banks that provided Mortgages, lending and banking services for working people and small business. Profit margins were small and careful management of limited resources was required. They were very community orientated.

The movie "Its a wonderful Life" gives a sugarcoated impression of what earlier days of these lending institutions and what their purpose was. They were an important part of middle American communities but not particularly difficult to manage and operate. Their market was mortgages.

By the late 1970s the S&Ls were evolved but still highly regulated and mainly in small mortgages but a business that wanted more freedom. Collectively they had billions in assets.

The Federal Reserve increased its interest rates to fight inflation so that the S&Ls were lending a lower rates than they borrowing. The fixed term mortgages that the S&Ls had were suddenly a liability. Different lending products were made to deal with this but there were still many S&L failures.

In the early 1980s deregulation came in and with it opportunities and dangers. The Financial markets were wide open. Investors were looking for the best deal to put their money to work. Trying to expand their business, small banks would offer great interest rates to get investors. They began to attract much larger investments than they ever had before. Deregulation allowed them to lend in different ways.

They were flush with money and had to put it to work. They became a motivated lender. They started to put money into riskier investments to get a high return to pay the higher interest rates they had promised. Some of these investments didn't work out and the bankers were often financially unsophisticated at choosing them because they had limited experience in this type of lending. Fraud was also a problem.

Regulatory oversight was slow and ineffective. Bad investment choices and larger interest payments put the squeeze on that the small S&Ls which didn't have the resources to survive. The was a large number of S&L failures.