1. Introduction

The Savings and Loan Industry

The savings and loan industry is established for the purpose of collecting and accumulating customer savings as well as lending money such as mortgages, personal, and business loans at an established market interest for both parties. Savings and loan institutions are usually shareholder-owned in order to limit a single party of having one direct influence on the institution. (Amadeo, 2018)

In the United States, the savings and loan industry has been established since the 19th century. After World War II, there was constant growth and demand for savings and loan institutions to fuel even further loans and drive saving deposits (Robinson, 2013). This increase in the establishment of these institutions led to a heated competition between these institutions and retail banks.

Due to the heated competition, the government intervened by imposing an interest rate ceiling. The interest rate ceiling sets a border for both retail banking and savings and loan businesses on the interest rate that they could offer their customers for their deposits (Robinson, 2013). This limited the competitive pressure within the market.

2. Background on the Savings and Loan Crisis

Once the ceiling was imposed and the competitive pressure cooled down, Saving and Loan institutions found it hard to compete efficiently against the retail bank industry. In 1979, As a result of the inability to compete and the unattractive interest rates offered, their customers withdrew their deposits and invested in money market funds (Investopedia, 2018) instead, in order to obtain a better return on their deposits and investments. As a result, a series of governmental regulations were proposed between 1980 and 1982 as a mean to help the institutions, which had a direct effect on who the savings and loan institutions could lend to, as well as their risk practices and financial accounting (The WritePass Journal, 2011).

When the interest rate ceiling was imposed, it led to the dramatic increase in interest rates and inflation. As interest rates rose, the mortgages that the institutions had issued out began to lose their initial value, which had a dramatic effect on the industry’s net worth.  To avoid dealing with the losses, federal regulators took steps to deregulate the industry in the hope that it could grow out of its problems. The industry’s problems, though, grew even more severe with the deregulation, and the burden was then shifted on taxpayers. ‘By the beginning of 1990, approximately 1,000 of the nation’s savings and loans had failed. The total cost of the savings and loan crisis for all stakeholders was  approximately $160 billion.’(Amadeo, 2018). The following table shows the breakdown and distribution of the cost among all suffering stakeholders of the crisis.