Implications of the Savings and Loan Debacle: Lessons for the Banking Industry

By Reinstein, Alan; Steih, Paul W. | Review of Business, Fall 1995 | Go to article overview

Implications of the Savings and Loan Debacle: Lessons for the Banking Industry


Reinstein, Alan, Steih, Paul W., Review of Business


Congress and the White House enacted the Federal Deposit Insurance Company (FDIC) Improvement Act of 1991 to overhaul the banking industry. Key provisions of this Act include having federal regulatory agencies establish managerial, operational and financial standards for insured depository institutions. The managerial and operational standards require that all federally insured banks have adequate internal accounting controls (i.e. to prevent, detect and minimize the potential for fraudulent transactions); appropriate underwriting standards for issuing and monitoring loan portfolios; and reasonable compensation (banning them from overpaying their officers and directors).

Financial standards require certain minimum capital ratios; earnings levels sufficient to absorb losses without impairing capital; and minimum market to book value ratios for the institutions capital stock. Based upon these financial standards, regulatory agencies will classify FDIC-insured financial institutions into five categories:

a. Well capitalized (where few problems seem to exist);

b. Adequately capitalized (where regulatory approval is needed to obtain brokered deposits);

c. Undercapitalized (where regulators must approve a capital restoration plan);

d. Significantly undercapitalized (where regulators can restrict financial operations, replace officers and directors and require divestiture of the institution, affiliate or subsidiary); and

e. Critically undercapitalized defined by law as tangible equity ratio below 2%) (where regulators must require the institution to prepare for conservatorship within 90 days of it becoming critically undercapitalized).

With the initial implementation now complete, we have seen that these laudable concepts may be too restrictive in some areas and yet not go far enough to avert a banking industry debacle similar to that in the thrift industry, where U.S. taxpayers are projected to have lost almost half a trillion dollars. Management, depositors and United States taxpayers must act to ensure that the problems of the thrift industry do not recur in the banking industry. The purpose of this study is to outline the thrift industry crisis, the resulting government regulation and discuss how to avert its recurrence in the banking industry.

Background of the Thrift industry Crisis

Many thrift executives, accountants and attorneys facing severe civil and criminal penalties for not adhering to their professions' standards have assumed much of the blame for the thrift industry debacle [e.g., Wayne, 1989]. However, the U.S. government, which deregulated the thrift industry, increased the insurance levels provided on thrift deposits and "encouraged" thrifts to make risky, high yield investments with depositors' money, is at least as culpable for this recent crisis. Through deregulation, the government significantly reduced the thrifts minimum capital requirements, expanded the types of assets allowed to comprise the institution's equity structure, allowed nonresidential real estate and consumer loans to comprise up to 70 percent of thrifts loan portfolios -- where they had been restricted previously to the less volatile residential home mortgage market, and permitted accounting rules to not portray accurately this vast erosion of value.

Deregulation and the Emerging Fairy Tale -- In 1980 and 1982, Congress deregulated the thrift industry [Cairs, 19911. Interest rate caps were lifted, deposit insurance levels increased, and accordingly, thrift institutions became more aggressive in their investments. This partial deregulation of the thrift industry encouraged higher risk investments with potentially higher rewards. Real estate and business investors capitalized on the newly deregulated industry to make business investments using only three percent of their own capital; the government provided the other 97 percent and guaranteed depositors the return of their money. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Implications of the Savings and Loan Debacle: Lessons for the Banking Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.