Article Abstract:
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was signed into law on August 9, 1989. The law allocates $50 billion to resolve financial problems in the thrift industry and abolishes the Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC). It replaces the FHLBB and the FSLIC with new agencies including: the Office of Thrift Supervision (OTS), which regulates savings institutions; the Federal Housing Finance Board, which oversees Federal Home Loan Banks; and the Resolution Trust Corporation, which eliminates failed thrifts after January 1, 1989. The new legislation empowers the OTS to issue: cease and desist orders limiting the growth of thrifts; civil money penalties for law violations or illegitimate practices; and a six year statute of limitations to bring enforcement actions against former employees.
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Article Abstract:
The reason why the US has such a poor record in safeguarding the savings and loan (S&L) industry has to do with the nature of the banking industry. Unlike other industries, in banking, cash on hand is usually a liability, while loans are assets. Banks have to balance depositors' need for safety and borrowers' need for easy credit. The first S&L was established in 1831. S&Ls' assets were illiquid, meaning that they would not be able to avoid failure by paying money to depositors if they panicked. As the US grew, the money supply was determined by a system consisting of hundreds of independent banks that were well regulated and poorly regulated by state governments. Therefore, local bank failures and national financial panics were inevitable.
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Article Abstract:
President Bush's policy dealing with the building and loan crisis has made the federal guarantee to depositors explicit, expressed commitment to the industry, and provided direction for bank managers and regulators. Credit managers need to understand that the distress of the savings and loan industry is not unique. It is a result of changes in the US financial system that developed from the inflation of the Vietnam War era, high interest rates, and recession.
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