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FAILURES

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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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