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The 1980's

The 1980s

  • Stamp depicting the fall of Berlin WallThe economy slows because of "stagflation," the economic problem of excess capacity and unemployment coexisting with inflation and no economic growth.

    The S&L industry has huge volumes of low, fixed-rate mortgages that were issued in the 1950s and 1960s. The gap between what the S&Ls earn on these mortgages and what S&Ls pay for new deposits erodes the capital of the S&Ls.

    In the era of financial deregulation in the 1980s, S&Ls embark on speculative ventures, many of which are in questionable real estate projects. When the real estate market weakens and oil prices fall, many S&Ls go bankrupt. During the 1980s, Federal Savings and Loan Insurance Corporation (FSLIC) capital is depleted.

    Most new Lesser Developed Countries (LDC) bank loans cover accrued interest on existing debt and maintain levels of consumption. The new loans are not used for productive investments. Many banks write off the bad loans.

    Stock market prices begin a steady climb, and the volume of shares traded increases dramatically. Many of those shares are traded by institutional investors, mutual funds, and large commercial investors.

    Securities transactions are increasingly conducted by computers, which are programmed to buy automatically within specified parameters.

    The electronic funds transfer (EFT) system is widely implemented.

    S&L and bank failures rise because of economic, financial, legislative, and regulatory activities.

  • Farm landA series of crises converge in the 1980s, some geographical and some sectoral: mutual savings banks in the Northeast; S&Ls nationally; agricultural banks in the Midwest; oil patch banks in the Southwest; and real estate loans in the Northeast, California, and Florida.


  • S&L combined net worth (capital) is a negative $18 billion—85 percent of the S&Ls are losing money; 15 percent of S&Ls are broke.
  • Problems with mutual savings banks begin. Most of these banks are in the Northeast and are supervised and insured by the FDIC.
  • The FDIC employs 3,644: 2,544 are bank examiners and 460 are bank liquidators.
  • Ten FDIC-insured banks with $236 million in assets fail.
  • FDIC's insurance fund has a balance of $11 billion.
  • Ford, GM, and Chrysler logosThe "Big Three" American car manufacturers (Ford, GM, and Chrysler) suffered through the 1970s, as Japanese competitors led by Honda and Toyota outperformed them in quality and price. Chrysler, which lacks the vast cash reserves of GM and Ford, is brought to the brink of bankruptcy by 1980. President Jimmy Carter signs a bill authorizing $1.2 billion in federal loans to save the failing Chrysler Corporation. It is the largest federal bailout to date.
  • IBM launches its first line of personal computers.

Depository Institutions Deregulation and Monetary Control Act of 1980
This act, which is passed as a response by Congress to get S&Ls out of interest- rate mismatch, is an effort to deregulate S&Ls.

This act:

  • Begins the process of phasing out Regulation Q—or Reg Q—(the Federal Reserve's regulation that dictates what banks and S&Ls can pay on deposits)
  • Allows financial institutions to offer negotiable order of withdrawal (NOW) accounts (interest-bearing checking accounts)
  • Allows S&Ls to offer checking–type accounts
  • Establishes loan-loss-reserve requirements
  • Allows S&Ls to issue credit cards
  • Increases THE FDIC deposit insurance coverage from $40,000 to $100,000.


  • U.S. Presidents
    during the 1980s

    Ronald ReaganRonald Reagan

    GDP declines 2 percent.
  • Mortgage rates reach 21 percent.
  • Prime rate reaches 21.5 percent—the highest rate ever.
  • Inflation reaches 14 percent.
  • From 1981 through 1986, the value of farmland drops by 30 percent.
  • Oil prices drop.
  • U.S. oilrig operations drop by 40 percent between December 1981 and July 1982.

Tax Reform Act of 1981
This act, among its many provisions, provides S&Ls with opportunities in real estate lending, and provides tax incentives to encourage real estate investment.


  • Oil rigPenn Square Bank in Oklahoma City fails with $511 million in assets. The bank had generated billions of dollars in speculative oil and gas exploration loans, many of which are worthless. To support its rapid growth, the bank had sold participations in energy loans to large regional banks, including Continental Illinois ($1 billion) and Chase Manhattan Bank of New York ($212 million).
  • First quarter, the S&L industry suffers losses of $3.3 billion.
  • Organization of Petroleum Exporting Countries (OPEC) crude reaches a high of $42 a barrel.
  • Net worth certificate program provides regulatory capital forbearance to help strengthen ailing mutual savings banks.

Recession of 1982
When President Jimmy Carter leaves office in 1981, the U.S. economy is in desperate circumstances. The major economic problem is external: The Iranian revolution disrupts Iranian oil production and creates a global shortage of petroleum, which drives prices to record highs

After this recession, the economy grows, inflation slows, unemployment and interest rates decline, and the economy appears to be favorable for banking.

Garn-St Germain Depository Institutions Act of 1982 (Garn-St Germain)
This act is an attempt to address the interest rate mismatch, to deregulate S&Ls, and to provide new business opportunities to S&Ls. Prior to this act, S&Ls had to have most of their assets in real estate lending.

This act:

  • Accelerates the phasing out of interest rate controls (Req Q) from 1984 to 1986.
  • Allows S&Ls to have up to 50 percent of assets in commercial (development/construction) real estate.
  • Allows S&Ls to have up to 30 percent of assets in consumer loans, commercial paper, and corporate debt.
  • Allows S&Ls to use land and other non-cash assets as capital instead of the previously required cash.
  • Enhances the powers of the FDIC and Federal Savings and Loan Insurance Corporation (FSLIC) to provide aid to troubled institutions, including net worth certificate programs.
  • Authorizes S&Ls and banks to offer money market deposit accounts.

International Lending Supervision Act of 1983
This act directs all banking regulatory agencies to ensure that all banking institutions maintain adequate capital levels. Failure to do so is made an unsafe and unsound practice.


  • After 50 years, the FDIC still takes in more in premiums than it loses through failures.
  • 48 FDIC-insured banks fail with $7 billion in assets.
  • The Office of the Comptroller of the Currency (OCC) issues record numbers of bank charters, and by law, the FDIC must grant deposit insurance to all nationally chartered banks. This policy changes in 1991, with the passage of a new law that requires all banks to apply for deposit insurance independently of the chartering process.
  • Eight chain banks in Tennessee (totaling $826 million is assets) owned by the Butcher family (Jake and C.H. Butcher, Jr.) fail simultaneously. The Butcher brothers are eventually sent to prison.


  • Continental Illinois National Bank certificateContinental Illinois National Bank in Chicago, Illinois, with $34 billion in assets, is the largest bank to ever fail in the FDIC’s history. The bank is weakened by its participations in Penn Square energy loans. Continental experiences a high-speed electronic bank run. Bank regulators are faced with a potential run on the bank and provide a $2 billion assistance package.

    The FDIC promises to protect all of Continental's depositors and other creditors, regardless of the $100,000 limit on deposit insurance. Continental receives assistance from the FDIC because it is deemed "too big to fail." (In 1997, the estimated cost to the FDIC of resolving Continental was $1.1 billion.)

  • For the first time, the FDIC spends more on resolving failures than it receives in premiums.
  • 79 FDIC-insured banks with $3 billion in assets fail.
  • The Federal Home Loan Bank Board (FHLBB) chairman testifies before the House Banking Committee, stating that an S&L crisis is imminent.
  • The banking regulators individually publish new uniform capital standards.
  • In response to a 1983 law, banking regulatory agencies set minimum capital requirement standards for individual institutions.


  • L. William SeidmanL. William Seidman becomes the chairman of the FDIC.
  • 120 FDIC-insured banks with $8.7 billion in assets fail—the first time more than 100 banks fail in one year since the FDIC was created.


  • Real estate investments are less attractive because of overbuilding and the Tax Reform Act of 1986.
  • A $15 billion attempt to recapitalize Federal Savings and Loan Insurance Corporation (FSLIC) fails in Congress. The next year, Congress authorizes $10.75 billion.
  • Reg Q, the regulation that dictated what banks and S&Ls can pay in interest, is fully phased out in accordance with the 1980 law.
  • 1,840 mutual funds control $716 billion in stock, bonds, and money market assets.
  • 138 FDIC-insured banks with $7 billion in assets fail.

Tax Reform Act of 1986
This act repeals many of the 1981 tax incentives that were meant to encourage real estate investment.

Competitive Equality Banking Act of 1987 (CEBA)
This act:

  • Authorizes $10.75 billion to recapitalize Federal Savings and Loan Insurance Corporation (FSLIC) over a three-year period
  • Grants the FDIC bridge-bank authority
  • Becomes the first legislation to explicitly state that insured deposits are backed by the full-faith-and-credit of the U.S. government.


  • Alan GreenspanAlan Greenspan becomes the chairman of the Federal Reserve Board.
  • Federal Savings and Loan Insurance Corporation (FSLIC) is insolvent by $6 billion.
  • S&Ls lose $30 million each business day.
  • FDIC monitors 1,575 problem banks with $385.5 billion in assets. More than 10 percent of banks are on the FDIC’s problem list.
  • The FDIC holds $18.3 billion in its insurance fund—the most ever.
  • 184 FDIC-insured banks with $7 billion in assets fail.
  • The Dow falls 23 percent in one day (taking 18 months to recover); the Federal Reserve Board floods the economy with money.
  • Vernon Savings in Dallas, Texas, an FSLIC-insured institution, fails with $1.2 billion in assets (98 percent of its loans are in default).


  • 223 FSLIC-insured S&Ls fail.
  • 200 FDIC-insured banks with combined assets of $35.7 billion fail.
  • FDIC records a loss for the first time.
  • Despite growing problems, the banking industry earns record profits of $24.8 billion.
  • First Republic in Dallas and Houston, Texas, with $31.2 billion in assets, fails. It is the costliest FDIC resolution to date at $3.7 billion.
  • First City Bank in Houston, Texas, with $12.3 billion in assets, fails. The bank receives a $900 million loan from FDIC. (It later closes in 1992.)
  • The central bank governors of the Group of Ten (G-10) countries adopt the Basel Capital Accord, known as Basel I Accord, which provides procedures for factoring on- and off-balance-sheet risks into the supervisory assessment of capital adequacy.


  • FDIC has about 8,000 employees.
  • 206 FDIC-insured banks with $29.2 billion in assets fail—the most in FDIC history. Two-thirds of these banks are in Texas.
  • Lincoln Savings and Loan in Irvine, California, with $5.5 billion in assets, fails. Charles Keating, the owner, is investigated for violating investment rules. There are allegations of political influence.
  • Texas’ second largest bank, MCorp in Dallas, Texas, with $15 billion in assets, fails.
  • The Berlin Wall comes down. The end of the Cold War results in a so-called peace dividend for the U.S. economy.

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
FIRREA is the most important banking law since the Great Depression when the FDIC was created. FIRREA is the beginning of statutory attempts to re-regulate the banking and S&L industry. This act authorizes the use of taxpayer money to resolve S&L failures.

This act:

  • Abolishes the Federal Savings and Loan Insurance Corporation (FSLIC), which has provided deposit insurance to S&Ls since 1934
  • Creates two insurance funds: the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF)—both of which are administered by the FDIC
  • Establishes the Resolution Trust Corporation (RTC) as a temporary agency to resolve S&L failures from August 9, 1989, to July 1, 1995
  • Provides funding for the RTC: $30 billion from the sale of bonds, $18 billion from the U.S. Treasury, and $2 billion from the Federal Home Loan Bank Board (FHLBB)
  • Replaces the FHLBB with the Office of Thrift Supervision (OTS) to regulate and supervise S&Ls
  • Gives the FDIC back-up supervisory authority over S&Ls
  • Increases the FDIC’s Board of Directors to five members from three by adding a vice chairman position and the director of the newly formed OTS.

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Last Updated 05/02/2006 learning@fdic.gov

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