Savings and Loan Bailout The Financial Institutions Reform Recovery and Enforcement Act of 1989

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Immediately after taking office, the first Bush administration proposed new legislation to provide adequate funding to close down the insolvent S&Ls. The resulting legislation, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), was signed into law on August 9, 1989. It was the most significant legislation to affect the thrift industry since the 1930s. FIRREAs major provisions were as follows: The regulatory apparatus was significantly restructured, eliminating the Federal Home Loan Bank Board and the FSLIC, both of which had failed in their regulatory tasks. The regulatory role of the Federal Home Loan Bank Board was relegated to the Office of Thrift Supervision (OTS), a bureau within the U.S. Treasury Department whose responsibilities are similar to those that the Office of the Comptroller of the Currency has over the national banks. The regulatory responsibilities of the FSLIC were given to the FDIC, and the FDIC became the sole administrator of the federal deposit insurance system with two separate insurance funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). Another new agency, the Resolution Trust Corporation (RTC), was established to manage and resolve insolvent thrifts placed in conservatorship or receivership. It was made responsible for selling more than $450 billion of real estate owned by failed institutions. After seizing the assets of about 750 insolvent S&Ls, over 25% of the industry, the RTC sold over 95% of them, with a recovery rate of over 85%. After this success, the RTC went out of business on December 31, 1995.

The cost of the bailout ended up on the order of $150 billion. The funding for the bailout came partly from capital in the Federal Home Loan Banks (owned by the S&L industry) but mostly from the sale of government debt by both the Treasury and the Resolution Funding Corporation (RefCorp).

FIRREA also imposed new restrictions on thrift activities that in essence reregu-lated the S&L industry to the asset choices it had before 1982. It increased the core-capital leverage requirement from 3% to 8% and imposed the same risk-based capital standards imposed on commercial banks. FIRREA also enhanced the enforcement powers of thrift regulators by making it easier for them to remove managers, issue cease and desist orders, and impose civil money penalties.

FIRREA was a serious attempt to deal with some of the problems created by the S&L crisis in that it provided substantial funds to close insolvent thrifts. However, the losses that continued to mount for the FDIC in 1990 and 1991 would have depleted its Bank Insurance Fund by 1992, requiring that this fund be recapitalized. In addition, FIRREA did not focus on the underlying adverse selection and moral hazard problems created by deposit insurance. FIRREA did, however, mandate that the U.S. Treasury produce a comprehensive study and plan for reform of the federal deposit insurance system. After this study appeared in 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which engendered major reforms in the bank regulatory system.

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