Savings and Loan Crisis
The collapse of 1,043 out of 3,234 savings and loan associations (S&Ls) in the United States during the 1980s and 1990s
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
What was the Savings and Loan Crisis?
The savings and loan crisis refers to the collapse of 1,043 out of 3,234 savings and loan associations (S&Ls) in the United States during the 1980s and 1990s. The S&L crisis was considered to be one of the most devastating failures of the banking industry in the United States after the Great Depression.
An S&L is a type of financial institution that receives deposits from clients in return for providing loans for mortgages, car purchases, or other personal loans.
S&Ls were once considered to be a secure way to receive mortgages when Americans purchased property. However, during the 1970s, the U.S. experienced high inflation rates, high unemployment rates, and slow economic growth, which led to a period of stagflation in the domestic economy. As a result, the number of individuals who applied for mortgages dropped significantly, which devastated the S&L industry.
Additionally, volatility in interest rates, changes in regulations, the delayed closure of unprofitable S&Ls, the growing popularity of money market accounts, and defaults in mortgage loans also contributed to the downfall of S&Ls.
As a result, many S&Ls ended up filing for bankruptcy during the 1980s. The savings and loan crisis caused losses amounting to $160 billion, where taxpayers shouldered $132 billion, and the S&L industry paid the rest.
Problems of Deregulation for Savings and Loan Associations
The Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St Germain Depository Institutions Act of 1982 were established in hopes of allowing the S&L industry to expand and offer a wider variety of financial products. The legislation gave S&Ls the same capabilities as commercial banks without being subjected to the same degree of restrictions. In particular, the deregulation removed loan-to-value ratios and interest rate caps.
As a result, S&Ls were able to use federally-insured deposits to engage in high-risk financial activities, including working with junk bond investments. Since there were no longer interest rate caps, S&Ls were also able to offer high rates in order to attract more customers. In order to cover their losses from offering high rates, they were involved with high-risk financial activities, which further worsened their losses.
When inflation and interest rates increased in the 1970s, they became a problem for S&Ls. Not as many people wanted to take out mortgages due to the high interest rates, which reduced the net worth of the S&L industry. Additionally, the deregulation laws did not actually improve the financial situation of S&Ls, even though deregulation was meant to bolster the S&L industry.
In 1983, around 35% of America’s S&Ls were not operating profitably, and 9% were bankrupt. S&Ls continued to provide loans, and their losses continued to increase.
The Keating Five Scandal
During the savings and loan crisis, five American senators were investigated by the Senate Ethics Committee in 1989. The scandal was named after Charles Keating, who was the head of the Lincoln Savings and Loan Association. The Keating Five included John Glenn (D-Ohio), Alan Cranston (Democrat-California), John McCain (R-Arizona), Dennis DeConcini (D-Arizona), and Donald Riegle (D-Michigan).
The Keating Five received $1.5 million in campaign contributions from Charles Keating. As a result, the Keating Five put pressure on the Federal Home Loan Banking Board to disregard suspicious activities that the Lincoln Savings and Loan Association was involved with.
Impact on the American Economy and Financial Industry
The delayed closure of unprofitable S&Ls continued to create losses for the S&L industry, which subsequently forced the Federal Savings and Loan Insurance Corporation (FSLIC) to file for bankruptcy. The savings and loan crisis also became one of the reasons for the recession in 1990 in the United States.
During the recession, the number of home purchases was as low as the number of purchases during World War II. In particular, the savings and loan crisis was a major issue in Texas, as more than half of the S&Ls were located in the state.
Since the savings and loan crisis, the remaining S&Ls in the United States have merged or have been acquired by bank holding companies. Today, both S&Ls and banks now operate under the same regulations for banks.
Related Readings
CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)® certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
