What are the similarities and differences between the savings and loan (s & l) crisis of the 1970s through the 1990s and the subprime crisis in 2007??

What are the similarities and differences between the savings and loan crisis (S & L) of the 1970s through the 1990s and the subprime crisis in 2007?

The savings and loan crisis and the subprime mortgage crisis began when banks created new profit centers after deregulation and reached a tipping point due to an economic shock. The main differences between the two banking crises were the impact on the broader economy and the size of the bailouts.


Savings and loan institutions were under significant stress as they faced dwindling deposits due to interest rate volatility. At the time, savings and loan banks were tightly regulated, with strict limits on insurance they could pay out on deposits, and their activities were limited to deposit taking and mortgage lending.

With their survival in doubt, the federal government relaxed these regulations and allowed institutions to compete with others on interest rates and provide them with various financial services. The changes in these regulations made savings banks and credit institutions a hot target for capital.

During the Reagan era's zeal to shrink government, there were significant cuts in regulatory personnel. This downsizing, combined with a reduction in regulation, proved to be a dangerous combination.

For the subprime mortgage crisis, the problem began with the repeal of the Glass-Steagall Act in 1999. This essentially gave banks permission to take on more risk and lifted leverage. Banks rushed into risky ventures, including the origination of subprime mortgages. Lack of regulation also contributed to the Bush administration's curbs on financial regulation. Like savings and loans, strong economic conditions and rising asset prices masked imbalances beneath the surface.

Economic shocks

The turning point for the subprime market was when many of the floating-rate instruments priced higher as the rise in housing prices came to an end. Many began to pay off their loans. The flawed assumption behind these loans was that lending to unqualified buyers was not a problem because they could always sell the houses at higher prices if they could not make payments. This was based on the nearly 50-year trend of rising home prices, which was abruptly hit by rising interest rates, a weakening economy and an increasing housing supply. Because of the leverage at these banks, the loss of subprime mortgages was insolvent in many cases.

The shock to savings and loan institutions came with sharply falling oil prices, which led to defaults on many loans in oil-rich states.This led to insolvency in many of these institutions and caused instability in the financial system. This lack of trust caused many to pull money from these institutions, exacerbating the problem.


Both crises had a negative impact on confidence in the financial system. However, the savings and loan crisis was isolated in one part of the economy, while the subprime crisis eventually led to a complete halt in the months of economic activity.

Both crises led to bailouts, but the size of the bailouts varied. The bailout and loan rescue amounted to $160 billion, while the bailout due to the subprime crisis amounted to almost $1. 6 trillion. This figure does not include hidden costs.

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