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The Savings and Loan Crisis (S&L) of the 1980s and early 1990s was a massive economic crisis that contributed to a recession in the United States, with hundreds of savings and loan institutions (S&Ls) collapsing and losing billions of dollars. The roots of this economic crisis lay in excessive risk-taking, speculation and lending arising from deregulation and the resultant moral hazard created by taxpayer bailout guarantees, which led to widespread fraud among S&Ls.
The S&L crisis took place in two stages. The first stage was between the early 1980s and mid-80s, when intense competition and loose regulation led to excessive lending for real estate ventures. S&Ls were eager to finance real estate projects as it offered better returns that other investments, so they heavily invested in mortgages, land and construction loans. These investments depended heavily on the health of the real estate market, which saw rapid inflation in the late 70s and early 80s. When the real estate market collapsed in the mid-80s, many S&Ls found themselves unable to service their loans or absorb the losses from their investments.
In the second stage of the S&L crisis, which lasted from the mid-80s to the early 90s, hundreds of S&Ls were declared insolvent. This caused the Federal Savings and Loan Insurance Corporation (FSLIC) - the federal agency responsible for insuring deposits at S&Ls – to collapse and cost US taxpayers billions of dollars. The S&L crisis was further compounded by criminal behavior among several S&L managements. In some cases, management gave out high-risk loans to dubious borrowers in exchange for bribes, kickbacks and other favors.
In the face of such an economic crisis, Congress stepped in and passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which amounted to a revamp of S&L industry regulations. This included regulations such as increased capital requirements, tighter regulations on insider lending, and stronger deposit insurance. FIRREA was considered a major step towards preventing such a crisis from occurring again, and its passage ultimately helped put an end to the S&L crisis of the 1980s and early 1990s.
The S&L crisis took place in two stages. The first stage was between the early 1980s and mid-80s, when intense competition and loose regulation led to excessive lending for real estate ventures. S&Ls were eager to finance real estate projects as it offered better returns that other investments, so they heavily invested in mortgages, land and construction loans. These investments depended heavily on the health of the real estate market, which saw rapid inflation in the late 70s and early 80s. When the real estate market collapsed in the mid-80s, many S&Ls found themselves unable to service their loans or absorb the losses from their investments.
In the second stage of the S&L crisis, which lasted from the mid-80s to the early 90s, hundreds of S&Ls were declared insolvent. This caused the Federal Savings and Loan Insurance Corporation (FSLIC) - the federal agency responsible for insuring deposits at S&Ls – to collapse and cost US taxpayers billions of dollars. The S&L crisis was further compounded by criminal behavior among several S&L managements. In some cases, management gave out high-risk loans to dubious borrowers in exchange for bribes, kickbacks and other favors.
In the face of such an economic crisis, Congress stepped in and passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which amounted to a revamp of S&L industry regulations. This included regulations such as increased capital requirements, tighter regulations on insider lending, and stronger deposit insurance. FIRREA was considered a major step towards preventing such a crisis from occurring again, and its passage ultimately helped put an end to the S&L crisis of the 1980s and early 1990s.