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in commercial paper, corporate debt and other instruments which they were previously forbidden from accessing— longterm loans and mortgages with locked in low interest rates plagued many thrifts’ and savings & loans’ balance sheets as they struggled to stay solvent.
The mounting crisis necessitated further action by the government in order to avoid widespread insolvency that would have taken place, which came under the Garn-St. Germain Act in 1982, which the Reagan presidency endorsed. The legislation, which was sponsored by a Republican and a Democrat, respectively, provided a degree of relief that many institutions required by authorizing the FDIC to credit firms which were insolvent or bankrupt, facilitated federal charter registration, allowed financial institutions to merge more easily and expanded the underwriting capabilities of savings & loans institutions.
This legislation stood to ensure that thrifts, savings & loans associations, commercial banks and mutual savings banks were deregulated and rendered solvent— but at a huge price. Many firms were required to merge or were consolidated, dramatically reducing the availability of smaller financial institutions throughout the 1980s. Additionally, the expanded investment capabilities that savings & loans associations were granted under the Garn-St. Germain Act— while originally designed to allow these institutions to remain solvent through shortterm financing— led to reckless investments and malfeasance that culminated in the Savings & Loans Crisis by the end of the decade.
In the end, deregulation was not the ultimate solution to the problems plaguing the industry throughout the 1970s and 1980s. While it appeared necessary in order to lift burdensome interest rate ceilings and to allow for greater investment capabilities, it couldn’ t stop the collapse of the thrift industry and it arguably contributed to these institutions’ demise by the start of the 1990s. However, this period of time does shed a bright light on the difficulties that banking institutions faced with post-Depression regulatory policies, as well as how they coped with them using financially innovative solutions.
Gabriel Suprise is a regulatory analyst working on Wall Street. Prior to moving into finance, he worked as a journalist covering financial derivatives and as a regulatory consultant in London. He holds Master’ s degrees from Columbia University and the London School of Economics in Financial History and Regulation, in addition to a Bachelor’ s degree from the University of Michigan— Ann Arbor.
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