The financial crisis of 2007 to 2008 is considered the worst since the Great Depression's wave of bank failures. But another banking crisis, which took place during the 1980s and early 1990s, ranks as one of the worst global credit disasters in history. Often overlooked amid the clamor of the 2008 credit bubble collapse, what became known as the savings and loan crisis (S&L) ultimately led to a massive taxpayer-funded rescue of an industry that essentially collapsed.
While smaller in magnitude than the bank crisis of the 1920s and 1930s, the S&L crisis pushed the state and federal regulatory and deposit banking insurance systems to their limits, ultimately leading to widespread changes to the regulatory environment. These events may come as a surprise to anybody too young to remember. Learn more about this crisis including the underlying causes, what remedies were put into place, and the overall cost to taxpayers.
- According to the FDIC, 1,617 commercial and savings banks failed between 1980 and 1994.
- There is no single factor that led to the surge in failed banking institutions during the 1980s and early 1990s.
- A number of agencies and institutions were created as a result of the S&L crisis
- The cost of the crisis was $160.1 billion, according to the U.S. General Accounting Office estimated.
Rising Bank Failures in the Early 1980s
According to data from the Federal Deposit Insurance Corporation's (FDIC) Division of Research and Statistics, 1,617 commercial and savings banks failed between 1980 and 1994. These failed institutions held roughly $206.2 billion in assets.
In another study using FDIC data, 1,043 thrift banks—institutions that mainly take deposits and originate mortgages—failed or were otherwise resolved between 1986 and 1995. These institutions represented assets totaling $519 billion. The banking crisis of the 1980s was, therefore, a two-headed beast, with one head related to the failure of the S&L crisis—which represented the bulk of the assets and number of banks—and the other linked to the failure of large commercial banks. Contrast this with bank failure data leading up to the 1980s and the magnitude of the crisis becomes evident. For example, just 0.3% of all existing banks failed from 1965 to 1979.
Bank failures eventually reached a post-Depression record of 279 in 1988, representing $54 billion nominal assets as the crisis deepened throughout the 1980s. While relatively small in terms of the total number of banks and bank assets—and in light of the ultimate costs—it led to the very first operating loss for the FDIC. Those losses continued until the end of 1991.
Factors Contributing to the Crisis
There is no single factor that led to the surge in failed banking institutions in the United States during the 1980s and early 1990s. Prior to the onset of the crisis, the legislative and regulatory environments were changing:
- The Depository Institutions Deregulation Committee and Monetary Control Act of 1980 removed many restrictions on thrifts and credit unions
- The Garn-St. Germain Depository Institutions Act of 1982 gave thrift banks greater latitude to invest in real estate loans
- The Tax Reform Act of 1986 fundamentally altered the banking landscape and engendered conditions that contributed to the banking crisis.
The changes in regulatory and economic environments induced unrestrained real estate lending beginning in the late 1970s and continuing throughout the early 1980s. Many analysts consider this to be the primary cause of the banking crisis of that time. Severe economic downturns in the early 1980s and early 1990s, as well as the collapse in real estate and energy prices during this period, were both outcomes and key precipitating factors in an increasingly unstable financial environment. Fraud—primarily looting or control fraud—and other types of insider misconduct played a major role in the overall crisis, as well.
Changes in regulatory and economic environments led to unrestrained real estate lending from the late 1970s through the early 1980s.
Government Interventions to Remedy the Problem
While government intervention in the banking sector has been cited as one of the major contributing factors to the financial crisis of the 1980s, subsequent action by the government also helped rescue the sector and bring about its reconstitution, even though it was fundamentally altered. As the S&L crisis worsened in the late 1980s, a series of regulatory and legislative changes resulted, with an alphabet soup of agencies and institutions created.
- The Office of Thrift Supervision (OTS) was established, with the authority to charter and regulate S&Ls
- The Resolution Trust Corporation (RTC) was set up in 1989 to dispose of the failed thrifts that fell into the hands of regulatory bodies
Congress also enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)—in which taxpayers began to foot the bill—in response to the deepening crisis. This replaced the Federal Savings & Loan Insurance Corporation (FSLIC) and allowed for the transfer of the failed FSLIC's assets, liabilities, and operations to the newly-created FSLIC Resolution Fund (FRF), which was run by the government's Federal Deposit Insurance Corporation (FDIC).
Ironically, sitting Republican presidents took actions during the S&L crisis and the subprime debacle of 2008 that contradicted their free-market rhetoric, largely in the form of big government bailouts for failing financial institutions.
Social Costs and Taxpayer Burden
The U.S. General Accounting Office estimated that the cost of the crisis was $160.1 billion—$124.6 billion of which was paid by the U.S. government from 1986 to 1996. These figures don't count state bailouts or money from thrift insurance funds. Most of the money was paid to depositors as compensation for money milked by insiders. The Federal National Commission on Financial Institution Reform, Recovery, and Enforcement (NCFIRRE) noted that "evidence of fraud was invariably present, as was the ability of the operators to 'milk' the organization through high dividends and salaries, bonuses, perks, and other means. The typical large failure was one in which management exploited virtually all the perverse incentives created by government policy."
The Bottom Line
The banking crisis of the 1980s was essentially a crisis of thrift institutions, with some large commercial bank failures thrown into the mix. A rapidly-changing bank regulatory environment, increased competitive pressures, speculation in real estate and other assets by thrifts, and unstable economic conditions were major causes and aspects of the crisis. The resulting banking landscape is one where the concentration of banking has never been greater.
While the number of banks on the FDIC's rolls declined from 14,392 to 7,511 between 1984 and 2004, the proportion of the assets in the banking sector held by the 10 biggest banks increased sharply to almost 60%, by 2005. The Gramm-Leach-Bliley Act, passed in 1999 removed the remaining legal barriers and allowed giants in commercial banking, investment banking, and insurance to combine operations under one corporate tent.