Statement to Congress

Federal Reserve Bulletin, May 1989 | Go to article overview

Statement to Congress


Statement to Congress

I am pleased to appear today before this committee to outline the views of the Board of Governors on the legislation proposed by President Bush for the reform and recovery of the thrift industry. The Board supports this comprehensive package of proposals to strengthen the thrift industry, and depository institutions generally, as well as to prevent the serious problems of the thrift industry from recurring.

The proposals in the bill include the following: (1) greatly enhanced supervisory, regulatory, and enforcement authority; (2) a new framework for resolving insolvent thrift institutions; (3) a separate insurance fund for thrift institutions under the administration of the Federal Deposit Insurance Corporation (FDIC); and (4) a strengthening of this new thrift fund, as well as the FDIC fund, through higher premiums.

Besides this legislative program, a number of administrative measures have been taken or are planned. As a first step to limit losses in insolvent institutions, more than 160 of them have been brought under federal control to date, and approximately 60 more will be similarly addressed in the next few weeks. As part of this effort, we are contributing 170 Federal Reserve examiners to the overall task force.

Moreover, to help attract responsible buyers for troubled thrift institutions, and as a result of the important changes in the environment for interstate banking, the Federal Reserve Board intends to reconsider the tandem operations restrictions on applications brought to the Board for acquisitions of failed or failing savings and loan associations. In addition, under a joint lending program the Federal Reserve Banks and Federal Home Loan Banks will share in meeting the liquidity needs of thrift institutions that cannot be met by Federal Home Loan Bank advances under traditional collateral standards, or market sources of funds. This arrangement is consistent with Federal Reserve Bank practice of lending secured to troubled institutions until their difficulties can be resolved. Loans under this arrangement will be secured by assets of the Federal Savings and Loan Insurance Corporation (FSLIC) as well as those of the troubled institution.

I would like to focus my remarks today on the two major elements of the President's program: (1) the restructuring and reform proposals, and (2) the procedures for dealing with failed savings and loan associations as well as the funding required to cover losses incurred by these institutions. Before turning to this task, I believe it would be useful to recall why we are facing a thrift problem and to draw some lessons from its causes.

Today's thrift industry losses grew partly out of the vulnerability of a fixed rate, long-term lender with relatively short-term liabilities, to changes in interest rates. As inflation, and interest rates, rose in the late 1970s and early 1980s, and as deposit rate ceilings were phased out, the resulting mismatch on the rising cost of deposit liabilities and the fixed return on mortgage assets produced substantial losses and a serious erosion of industry capital. Into this situation other elements were added. Expanded powers were mixed with inexperienced or dishonest management, brokered deposits that fed unchecked growth, lax accounting standards, and seriously inadequate supervision, all within the context of adverse economic conditions. It is sobering how these factors led so quickly to insolvencies. In a short period, the serious, but manageable, maturity-mismatch problem became the disastrous asset-quality problem that we face today.

In evaluating this situation, I would not limit my emphasis, as some have done, to focusing only on the decline in regional economies and, in particular, on the drop in oil prices. The regional economic problems were real, but in assessing responsibility it is important to recognize that the oversupply in the real estate market in certain area was at least partially a result of the lending by the savings and loan associations themselves. …

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