BPEA | 1987 No. 2

Thrift Industry Crisis: Causes and Solutions

1987, No. 2

FOR THE SECOND TIME this decade, the thrift industry is in crisis. Once again thrift industry performance is deteriorating, failures are widespread, the regulators are besieged, and Congress has passed major banking legislation following protracted debate. Indeed, the current difficulties will be harder and more costly to resolve than those of the early 1980s. The implications-for competition in financial services, availability of funds for housing, and federal budget expenditures-are profound. We begin our paper with a review of the thrifts’ difficulties, from signs of trouble in the 1970s to the contemporary attempts to shore up the deposit insurance fund. In doings o, we show how regulatory forbearance during the early 1980s turned an initial crisis, caused by the thrift industry’s undiversified portfolio of fixed-rate, long-term mortgages, into a near-disaster, in which hundreds of insolvent thrifts continue to operate. We assess the policy response to the current crisis and make recommendations of our own. Finally, we show how the recently deregulated thrift industry has been diversifying and moving away from its traditional role. We also discuss the outlook for the thrift industry in the context of regulatory reform, innovation, and competition.