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UNIVERSITÀ POLITECNICA DELLE MARCHE FACOLTÀ DI ECONOMIA “GIORGIO FUÀ” Curse of International Finance “ THE SAVINGS AND LOAN CRISIS IN US IN 1980s ” Realised by: Federica Ciccola Silvia Monterubbianesi Laura Scartozzi STRUCTURE OF THE PRESENTATION 1) Background 2) Deregulation 3) Causes / Effects 4) Consequences 5) Lesson : what have we learned ? 1) BACKGROUND WHAT IS A SAVING AND LOAN? It is a financial institution that accepts saving deposits and makes mortgages and other personal loans. ASSETS LIABILITIES LOANS DEPOSITS (home mortagages) REGULATORY APPARATUS Federal Home Loan Bank Board (FHLBB) : provided reserve credit for member institutions engaged in home mortgage lending. It administrated the FSLIC. Federal Savings and Loan Corporation (FSLIC) : was an institution that administered deposit insurance for savings and loan institutions in the United States. POLITICAL POINT OF VIEW: 2) DEREGULATION JIMMY CARTER (1977-1981): Depository Institutions Deregulation and Monetary Control Act of 1980: • removed the power of the Federal Reserve Board of Governors to set the interest rates of saving accounts • increased the deposit insurance from $40,000 to $100,000 • gave more freedom for loans Real Estate Boom RONALD REAGAN (1981-1989) : • decreased taxation The Garn-ST Germain Depository Institution Act of 1982: • the S&L could enter in new but riskier loan markets; • savings and loans were authorized to increase their consumer lending, from 20% to 30% of assets • eliminated interest rate ceilings The DEREGULATION of S&Ls gave them many of the capabilities of banks, without the same regulations as banks Tax reform act of 1986: limited many tax deductions on real estate and rental income. This caused the end of Real Estate Boom. BROKERED DEPOSITS Like certificates of deposits, they were purchased and resold by brokers. They were collective deposits that were signed by many people. The broker raised and deposed money in the S&L which had proposed the higher interest rate. Previously, banks and S&L could have only 5% of their deposits be brokered deposits, but this limit was surpassed. 3) CAUSES OF THE CRISIS Real interest rate rose to historically high levels in the 1980 and remained high throghout the decade. WHY ? Macro-economic scenario S&L’s evolutions Regulatory forbearance MACROECONOMIC SCENARIO Tight monetary policy Large federal budget deficits: the increase in government borrowing to finance budget deficits is not fully compensed by increased private saving, so the interest rate must rise Variable inflation rate : the expected real returns were not nearly as high as the ex-post realized. SAVING & LOAN EVOLUTION before deregolation after deregolation Assets Liabilities Assets Liabilities (long time) (short time) HOME MORTAGAGES (SAVING) DEPOSITS HOME DEPOSITS MORTAGES COMMERCIAL MORT. BROKERED CONSUMER LOANS DEPOSITS LEASES • the interest rate risk • the interest rate risk decreased was higher than default while the default risk increased risk on loans • the collateral was sure : • the assessment is not so severe the house itself and the guarantees required weren’t so sure WHAT HAPPENED ? MORAL HAZARD PREMIUM : due to the federal deposit insurance, the high yield institutions offered assets which are nearly perfect substitutes for deposits in safer institution To attract deposits, S&L proposed more high interest rates 4) CONSEQUENCES TROUBLED THRIFT OFFERED HIGH MADE RISKIER INTEREST OPERATIONS RATES HEALTHY THRIFT HAD TO REMAIN PAIED HIGHER COMPETITIVE FOR INTEREST RATES DEPOSIT FAILURES Insolvency by year-end 1986 of the FSLIC The failure of 1043 of thrift institutions 350 3,00% 300 2,47% 2,50% 250 2,23% 1,90% 2,00% 200 1,50% 150 1,32% Thrift Failures 1,00% Ratio(%) 100 Asset/GDP 0,70% 0,36% 50 0,24% 0,50% 0,09% 0 0,00% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 FIRREA Institutions Reform, Recovery, and Enforcement Act 1989, 9 August FIRREA provided substantial funds to close insolvent thrifts. it imposed new restrictions on thrift activities the regulatory apparatus was significantly restructured FSLIC and the Bank Board (FHLBB) were abolished FIRREA FDIC RTC Federal Deposit Insurance Resolution Trust Corporation Corporation Other thrift ReFCorp U.S Treasury FRF industry funds Resolution FSLIC Resolution Funding fund Corporation WHAT WAS THE TOTAL COST OF THE CRISIS? WHO PAY? Total Estimated S&L Resolution Cost (1986-1995 ): approximately $153 billion THRIFT INDUSTRY 19% PUBLIC SECTOR 81% Additional Government Borrowing Cost Social costs of non-intervention 5) LESSONS BEHIND EVERY CRISIS THERE ARE COMMON FACTORS, such as : asimmetryc informations lack of monitoring from the regulators regolatory forbearance taxpayers involvement lack of objective data THANKS FOR YOUR ATTENTION !!!!
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