WHAT IS THE Depository Institutions Act of 1982

The Depository Institutions Act of 1982 is a law the United States Congress passed in 1982 to increase the competitiveness of savings and loan insitutions.

BREAKING DOWN Depository Institutions Act of 1982

The Depository Institutions Act of 1982 intended to making savings and loan institutions more competitive. The act contained many provisions, but the best known is a section that enables thrift institutions to offer money market deposit accounts with no interest rate ceiling. Under the act, thrifts, which encompass savings and loans associations, credit unions and mutual savings banks, compete more effectively with money market mutual funds for capital.

The Depository Institutions Act also raised the ceiling on thrifts’ direct investments in nonresidential real estate. The act allowed thrifts to have up to 20-40 percent of their assets in nonresidential real estate and to have consumer lending take up 20-30 percent of their business. Formally, the Depository Institutions Act is sometimes referred to as the Garn-St. Germain Depository Institutions Act after the act’s sponsors, Congressman Fernand St. Germain and Senator Jake Garn.

Although it was welcomed at the time of its passage, critics say that the act led to or exacerbated the savings and loan crisis of the late 1980s. The critics argue that by raising the thrifts' cost of funds and allowing greater diversification in their loan activities, thrifts were both forced and encouraged to take on more assets with greater risk in relatively unknown areas. Many thrifts were ill-equipped to manage these assets, and a significant portion eventually went sour.

Depository Institutions Act of 1982 and the Institutions It Affected

The act itself is primarily known for shifting the abilities for thrift institutions and the kind of activity thrifts are allowed to engage in. Thrifts, along with commercial banks, qualify as depository institutions and are essentially savings and loan associations that specialize in real estate. Several factors distinguish thrifts from commercial banks; one of the most significant is that they can borrow money from the Federal Home Loan Bank System, which allows them to pay members higher interest. Another is that like most corporations, commercial banks are for profit, and have the goal of growing earnings, whereas thrifts specialize in mortgages and real estate lending. Their first mandate is to serve the members of the thrift, not profit. Thrifts tend to retain their loan portfolio rather than securitize loans, so members with atypical profiles that don't fit into agency mortgage standards may stand a better chance of securing a loan through a local thrift than a national commercial bank.