Academic journal article Atlantic Economic Journal

Savings and Loan Failure Rate Impact of the FDICIA of 1991

Academic journal article Atlantic Economic Journal

Savings and Loan Failure Rate Impact of the FDICIA of 1991

Article excerpt

Not since the years of the Great Depression have the regulatory authorities closed so many Savings and Loans (S&Ls) as they did during the 1980s and early 1990s. From 1942 through 1979, few S&Ls failed due to insolvency. However, beginning with 1980 and 1981, the number of S&L failures rose sharply, reaching 205 in 1988, 315 in 1990, and 232 in 1991.

Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991. This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls posing greater risk to the Savings Association Insurance Fund. The FDICIA added a requirement for "prompt corrective action" when an insured S&L's capital falls below prescribed levels. The FDICIA included other provisions as well, such as new real estate lending guidelines and restrictions on the use of brokered deposits [FDIC, 1992 Annual Report, pp. 22-3]. Simultaneously, interest rates dropped sharply in the early 1990s, "...leading to strengthened earnings and a significant decline in the number of problem institutions" [FDIC, 1992 Annual Report, pp. 22-3]. Meanwhile, S&L failures in 1992 fell to 69, followed by 39 in 1993, and 11 in 1994.

This note examines empirically whether the recent decline in S&L failures may be due solely to the recent sharp interest rate decline or to both lower interest rates and to the FDICIA, as well as other factors. …

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