Savings and Loans Crisis: Causes, Cost

How Congress Created the Greatest Bank Collapse Since the Depression

US Capitol Interior
Congress removed regulations that would have prevented the S&L crisis. Photo: Vito Palmisano/Getty Images

What Was the Savings and Loans Crisis?

Definition: The Savings and Loans Crisis was the greatest bank collapse since the Great Depression of 1929. By 1989, more than 1,000 of the nation's Savings and Loans (S&Ls) had failed. This effectively ended what had once been a secure source of home mortgages.

Half of the nation's failed S&Ls were from Texas, pushing that state into recession. As bad land investments were auctioned off, real estate prices collapsed, office vacancies rose to 30%, and crude oil prices fell 50%.

Some Texas banks, like Empire Savings and Loan, were even involved in illegal land flips and other criminal activities. 

The Federal Savings and Loan Insurance Corporation (FSLIC) had been created to insure their deposits, much like the FDIC does today. However, S&L bank failures cost the FSLIC $20 billion, which bankrupted it. In addition, more than 500 banks were insured by state-run funds. Their failures cost at least $185 million, thus destroying forever the idea of state-run bank insurance funds.  (Source: The Savings and Loan Crisis and Its Relationship to

Five U.S. Senators, known as the Keating Five, were investigated by the Senate Ethics Committee for improper conduct. They had accepted $1.5 million in campaign contributions from Charles Keating, head of the Lincoln Savings and Loan Association. They also put pressure on the Federal Home Loan Banking Board, the agency responsible for investigating possible criminal activities at Lincoln, to overlook possibly suspicious activities.

What Caused the Savings and Loans Crisis?

Savings and Loans were specialized banks that used low-interest, but federally-insured, deposits in savings accounts to fund mortgages. However, in the 1980s, money market accounts became more popular by offering higher interest rates on savings. Consequently, investors became pulling money out of savings accounts, depleting the banks' source of funds.

S&L banks asked Congress to remove the low-interest rate restrictions. In 1982, the Garn-St. Germain Depository Institutions Act was passed, which allowed S&Ls to raise interest rates on savings deposits. In addition, the banks were no longer restricted to mortgages, but were allowed to make commercial and consumer loans. Most importantly, the law removed restrictions on loan-to-value ratios. At the same time, the Federal Home Loan Bank Board regulatory staff was reduced thanks to budget cuts during the Reagan Administration. This further impaired their ability to investigate possible risky loans.

In an attempt to raise capital, banks invested in speculative real estate and commercial loans. Between 1982 and 1985, these assets increased 56%. In Texas, forty S&Ls tripled in size, some growing 100% each year. 

By 1983, 35% of the country's S&Ls weren't profitable, and 9% were technically bankrupt. As banks went under, the state and Federal insurance began to run out of the money needed to refund depositors. However, many S&Ls kept remained open, continued making bad loans, and the losses kept mounting.

By 1989, Congress and the President George H.W. Bush knew they needed to bail out the industry.

They agreed on a taxpayer-financed bailout measure known as the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). It provided $50 billion to close failed banks and stop further losses. It set up a new government agency called the Resolution Trust Corporation (RTC) to resell Savings and Loan assets, and use the proceeds to pay back depositors. FIRREA also changed Savings and Loan regulations to help prevent further poor investments and fraud.

How Much Did the Savings and Loans Crisis Cost?

Between 1986-1995, more than half of the nation's Savings and Loans, with total assets of more than $500 billion, had failed.

By 1999, the crisis cost $160 billion, with taxpayers footing the bill for $132 billion, and the S&L industry paying the rest. Article updated February 10, 2015