The Savings and Loan Crisis: Lessons From a Regulatory Failure
May 01, 2004

Between 1980 and early 1995, more than 5,000 savings and loans, commercial banks and credit unions failed in the U.S. The cost of resolving this crisis exceeded $190 billion. "The Savings and Loan Crisis: Lessons From a Regulatory Failure" looks back on this tumultuous period and explains what happened to America's banking institutions.

In a series of essays written by a respected and diverse group of regulators, scholars and practitioners, the authors argue that the collapse of the savings and loan industry was caused by a confluence of adverse economic conditions and misguided regulatory actions.

The initial adverse developments in the savings and loan industry that were to lead to the crisis were caused primarily by the interaction of excessive regulatory constraints and a rapidly changing financial marketplace. Added to these initial problems were a series of regulatory actions and accounting gimmicks that turned an already difficult situation into a disastrous one for taxpayers.

Although the savings and loan crisis was an accident, it was avoidable. Most of the factors responsible for initiating and exacerbating the industry's problems were preventable as is documented in this volume.

The savings and loan crisis taught us the important lesson that one must design banking regulations in such a manner as to allow institutions to adapt to changing competitive market forces. This basic message applies not just to the U.S. but also to every other country around the world.

"The savings and loan crisis is a textbook case of financial institutions breaking down through a unique combination of macroeconomic conditions, interest rate and tax policy shifts, structural changes in capital markets and financial institutions, and, ultimately, regulatory chokeholds and policy missteps that created a perfect financial policy storm," says Glenn Yago, Director of Capital Studies at the Milken Institute and co-editor of the book with James Barth, Senior Fellow at the Milken Institute and former chief economist of the Federal Home Loan Bank Board and the Office of Thrift Supervision.

The essays in this volume stem from a conference held by the Milken Institute in conjunction with the UCLA Anderson School of Business in 2002, Examination of S&Ls Roundtable, that brought together scholars on financial institutions to reflect upon the policy failures that resulted in the crisis.

The book is the fifth in the Milken Institute Series on Financial Innovation and Economic Growth, organized by Glenn Yago and James Barth. It is available at Kluwer Academic Publishers.