Outline 3 - Professor Akacem Money and Banking UNIT THREE...

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Professor Akacem Money and Banking UNIT THREE: Outline number 3 Crisis in the Banking Industry Lecture Material Optional: see "Savings and Loan Crisis" by Bert Ely, in The Fortune Encyclopedia of Economics , Warner Books, 1993 . Case studies viewed in class. I. Why Have An S & L ? a. Origins of the S & L's b. Structure of the S & L industry c. Two ways of Looking at a Financial Institution's Activity II. Factors that may have affected the S & L and banking crisis a. Deposit Insurance b. Accounting Mechanism c. Regulators (too lax vs too strict) d. Regional Economies e. Congress: Deregulation f. Capital Rules g. Monetary Policy (interest rate squeeze) g. FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991) forbearance . Recapitalize the fund. . minimize losses to taxpayers (early intervention, higher fees, risk based premiums .... ) III. Crisis in Banking: a. Too big to fail (see latest research by the Federal Reserve Bank of Minneapolis , in the Region "The Too Big To Fail Problem" in The Region , September, 1997) b. Basel agreement c. Glass Steagall Act (separation of banking and commerce) d. Garn Saint Germain Act (blurring distinctions) e. Brokered deposits (by banks and S and L, banned by FDIC but overturned by a federal court) f. Narrow banking: Core Banking vs. Traditional
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Professor Akacem Unit Three: Outline Three The Savings and Loans Crisis Crisis in the Banking Industry Lecture Material Optional: see "Savings and Loan Crisis" by Bert Ely, in The Fortune Encyclopedia of Economics , Warner Books, 1993 . Case studies viewed in class for the regular class only. I. Why Have an S & L? II. Factors that may affected the S & L and Banking Crisis III. Crisis in Banking I. Why Have an Savings and Loans? a. Origins of the Savings and Loans: Originally the S and L's were conceived to perform a special function in the financial market and that was the granting of home loan mortgages. In the beginning, their portfolios were straight forward. They took deposits and paid out an interest on them and turned around and made home loan mortgages mostly at a fixed rate in the early days. The S and L industry also received special incentives to be a major player in the home loan mortgage market. As an example, they were allowed to pay a slightly higher rate of interest than banks to encourage depositors to bring their funds to them. This is a reference to regulation Q, which limited the amount of interest paid. The regulation has, since, been phased out, but while it was enforced it did provide a competitive edge to the S and L industry. This way, they continued to be funded and were able to perform their role of financial intermediation. In other words, what was unique about the balance sheet of the S and L's was the simplicity of their balance sheet in the early days. In the 1950's and the 1960's, all went well particularly when the US was facing stable interest rates.
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