What is the 'Savings And Loan Crisis - S&L'

The Savings and Loan (S&L) Crisis began under the volatile interest rate climate of the 1970s, when vast numbers of depositors removed their money from the S&L institutions and deposited it in money market funds. This allowed for higher interest rates, because the funds were not governed by Regulation Q.

BREAKING DOWN 'Savings And Loan Crisis - S&L'

Once regulations were loosened, S&Ls began engaging in high-risk activities, such as commercial real estate lending and investments in junk bonds, to cover losses. Depositors in S&Ls continued to funnel money into these risky endeavors because their deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC).

Widespread corruption and other factors led to the insolvency of the FSLIC, the $124 billion bailout of junk bond investments and the liquidation of more than 700 S&Ls by the Resolution Trust Corporation.

The S&L Crisis is arguably the most catastrophic collapse of the banking industry since the Great Depression. Across the United States, more than 1,000 S&Ls failed by 1989, essentially ending one of the most secure sources of home mortgages.

The Texas Situation

The crisis was felt twice over in Texas, where at least half of the failed S&Ls were based. The collapse of the S&L industry pushed the state into a steep recession. Bad land investments were auctioned off, causing real estate prices to plummet. Office vacancies rose significantly, and the price of crude oil dropped off by half. Texas banks, such as Empire Savings and Loan, took part in criminal activities that further drove the Texas economy into the ground.

The Federal Savings and Loan Insurance Corporation and State-Run Funds

The FSLIC was established to provide insurance for individuals depositing their hard-earned funds into S&Ls. When S&L banks failed, the FSLIC was left holding a $20 billion check that inevitably left the corporation bankrupt. The defunct company can be likened to the Federal Deposit Insurance Corporation (FDIC) that oversees and insures deposits today.

During the S&L crisis, which didn't effectively end until the early 1990s, the deposits of some 500 banks and financial institutions were backed by state-run funds. The collapse of these banks cost at least $185 million and demolished the concept of state-run bank insurance funds.

The Keating Five Scandal

During this crisis, five U.S. senators – the Keating Five – were investigated by the Senate Ethics Committee due to the $1.5 million in campaign contributions they accepted from Charles Keating, the head of the Lincoln Savings and Loan Association. These senators also pressured the Federal Home Loan Banking Board to overlook suspicious activities in which Keating had participated.

RELATED TERMS
  1. Resolution Funding Corporation ...

    A mixed-ownership government corporation established by Congress ...
  2. Asset Management and Disposition ...

    A type of contract between the Federal Deposit Insurance Corporation ...
  3. Federal Savings And Loan Insurance ...

    The Federal Savings and Loan Insurance Corporation (FSLIC) is ...
  4. Bank Insurance

    A guarantee by the Federal Deposit Insurance Corporation (FDIC) ...
  5. Insured Financial Institution

    Any bank or savings institution that is covered by some form ...
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds ...
Related Articles
  1. Insurance

    From Booms To Bailouts: The Banking Crisis Of The 1980s

    The economic environment of the late 1970s and early 1980s created the perfect storm for a banking crisis.
  2. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  3. Insurance

    Insurance Companies Vs. Banks: Separate And Not Equal

    Insurance companies and banks are both financial intermediaries. However, they don't always face the same risks and are regulated by different authorities.
  4. Investing

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  5. Personal Finance

    Understanding Savings Accounts

    A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.
  6. Personal Finance

    Top 5 Biggest Bank Failures

    In recent decades, there have been some major bank failures. Here are five of the biggest in U.S. history.
  7. Investing

    Who Backs Up The FDIC?

    The FDIC insures depositors against loss, but what happens if it runs out of money?
  8. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Many factors go into how banks set interest rates for loans. Use this information to negotiate the best possible rate when you're borrowing.
  9. Investing

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
RELATED FAQS
  1. What major events and policy decisions led to the savings and loan crisis (S&L crisis)?

    Learn about the major events and policy decisions that led to the savings and loan crisis. The catalyst for the crisis was ... Read Answer >>
  2. What measures could the U.S. Government take to prevent another crisis similar to ...

    Discover what measures the U.S. government could take to prevent another crisis similar to the S&L crisis. The S&L crisis ... Read Answer >>
  3. What is the difference between a savings & loan company and a bank?

    Find out how a savings and loan company, sometimes also known as a thrift or savings institution, focuses on different types ... Read Answer >>
  4. What is the rate of return I can expect on a savings account?

    Find out what kind of return you can expect from the cash balance in your savings account and why interest rates have been ... Read Answer >>
  5. How does the deposit multiplier affect a bank's profitability?

    Find out how a deposit multiplier affects bank profitability, how it increases the supply of money in the economy and why ... Read Answer >>
  6. How liquid are money market accounts?

    Understand the characteristics that distinguish money market accounts from checking, savings account and money market funds ... Read Answer >>
Hot Definitions
  1. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  2. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  3. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  4. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  5. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center