Magazine article American Banker

Memo to Clinton: Congressional Zeal to Micromanage Can Thwart Your Goals

Magazine article American Banker

Memo to Clinton: Congressional Zeal to Micromanage Can Thwart Your Goals

Article excerpt

Since 1974, the number of thrifts in the United States has fallen to 1,900 from 5,000 - an enormous consolidation by any standard.

There were three tidal waves that washed more than 3,000 savings institutions away:

* The high inflation of the 1970s and the resulting inverted yield curve. Thrifts, with overwhelming concentrations of fixed-rate mortgages, saw their interest margins disappear as the liability side of the balance sheet became deregulated and cheap deposits were replaced with high-cost certificates of deposit and other instruments.

* The rapid deregulation of the Garn-St Germain Depository Institutions Act of 1982, and the lax supervision and mismanagement in its wake.

* The series of regional recessions, beginning in the Southwest in the 1980s and still affecting the Northeast and California. Severely depressed real estate values, coupled with substantial increases in unemployment, resulted in skyrocketing percentages of nonperforming loans.

What is becoming clearer is the role that government has played in all of this.

There were two dramatic shifts in the regulatory environment over the past 15 years.

A highly regulated period preceding 1978 included Regulation Q deposit-rate limits, restrictive usury laws at the state level, and significant underwriting restrictions, all of which contributed to the demise of many thrifts in the early 1980s.

From about 1979 to 1989, there was a complete reversal of government's attitude toward banking. Garn-St Germain, the elimination of Reg Q, and the lifting of virtually all other deposit rate restrictions completely undid the earlier restrictions.

These changes, coupled with sharp increases in deposit insurance coverage, laid the ground-work for the thrift problems that began to unfold in the latter part of the 1980s.

In response to the thrift debacle, Congress again reversed itself, imposing new restrictions with the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the reregulation of much of what had been deregulated. …

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