LOS ANGELES — 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, a new book from the Milken Institute and Kluwer Academic Publishers, looks back on this difficult 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. Poorly designed deposit insurance, faulty supervision and restrictions on activities prevented savings and loans from adapting to a changing financial marketplace. These institutions were prohibited from hedging interest rate and credit risks, and allowed limited portfolio diversification. These factors lay at the root of the crisis, they argue.
The savings and loan crisis was an accident, but it was an avoidable one. Most of the factors responsible for causing and exacerbating the industry′s problems were preventable, as is made clear in this volume.
"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 book examines the organizational, economic, political and regulatory effects that undermined savings and loans as financial institutions.
It also provides an insider′s view of the transformation of the financial services industry in the United States since the 1980s: how the managers and owners make decisions about product offerings and investments; how the regulators monitor performance and enforce the rules; and how Congress and the administration influence and are influenced by the financial services industry.
Lastly, it focuses attention on the lessons that should have been learned from this difficult period in the history of U.S. banking, and that should help prevent future banking crises in countries around the world.
The Savings and Loan Crisis: Lessons From a Regulatory Failure consists of 12 essays from regulators, scholars and legal and financial practitioners who were directly involved in the troubled decade of the 1980s. They include:
- Lawrence White, a professor at New York University′s Stern School of Business and former member of the Federal Home Loan Bank Board, who argues persuasively that "the political process originally refused to face up to the difficulties of the S&L industry and of deposit insurance and allowed both sets of problems to fester for far too long. We have learned a lot since then about the important roles of capital and of prompt corrective action."
- George Kaufman, director of the Center for Financial and Policy Studies at the School of Business Administration at Loyola University Chicago and co-chair of the Shadow Financial Regulatory Committee, states that "with the benefit of 20 years of hindsight, the essays in this book analyze and evaluate the causes and regulatory and legislative cures applied to identify lessons that may be useful both in preventing such crises in the future and in resolving them more efficiently at lower societal costs if they do occur."
- Edward Kane, a chaired professor at Boston College and first recipient of the Lifetime Achievement Award recently conferred by the Financial Intermediation Society, identifies lessons Latin American and Asian countries should have learned from the U.S. savings and loan crisis. He calls the book "a marvelous summary of layered incentive conflicts in corporate governance, government regulation and accounting that continue to bedevil us today."
The essays in this volume stem from a conference held by the Milken Institute in conjunction with the Anderson School of Business in 2002 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 from Kluwer Academic Publishers at http://www.wkap.nl/prod/s/MILK.