ESSAYS ON ISSUES
THE FEDERAL RESERVE BANK
OF CHICAGO
DECEMBER 1990
NUMBER 40
Chicago Fed Letter
The incredible shrinking
S&L industry
The savings and loan debacle has
important repercussions for many
parties. Among these is the savings
and loan association (S&L) industry
itself, which is shrinking rapidly as a
major financial player. For most of
the post-World War II period, savings
and loans were the great success story
among financial institutions in the
U.S. The assets of the industry grew
rapidly, not only in absolute dollar
terms, but also relative to most other
major types of financial institutions.
The market share of S&L assets in-
creased steadily from 6% of the assets
of 11 major types of financial institu-
tions in 1950, to 12% in 1960, to 14%
in 1970, and to 15% in 1980 (see
Table 1). In contrast, the market
share of commercial bank assets de-
clined from 52% in 1950 to 37% in
1980, of life insurance companies
from 22% to 12%, and of mutual
savings banks from 8% to 4%. Only
pension funds among the larger types
of institutions had increased their
market share more rapidly in this
period. S&Ls grew from the fourth
largest type of institution in 1950 to
the second largest in 1980, behind
only commercial banks.
Shrinking shares and numbers for
S&Ls . . .
S&Ls maintained their market shares
through most of the 1980s despite a
precarious financial situation. Pri-
marily as a result of losses from lend-
ing long and borrowing short when
interest rates soared in the late 1970s
and early 1980s, about 85% of all
S&Ls lost money in 1982, and when
measuring their assets and liabilities
on a market-value basis, some two-
thirds of the associations were insol-
vent. Although interest rates de-
clined sharply in the mid-1980s, many
S&Ls continued to lose money be-
cause of bad loans, excessive operat-
ing costs, including very high rates on
deposits, and fraud. Furthermore,
S&Ls incurred a sharp increase in
deposit insurance premiums—from
.08% to .21%—which also increased
operating costs significantly. Never-
theless, through 1988 they increased
their market share relative to com-
mercial banks and to life insurance
companies, which were the third
largest type of financial institution.
1. Market share changes for financial intermediaries
Assets 1990a
(billions % of total intermediary assetsa
|
Intermediary c |
)f dollars) |
1950 |
1960 |
1970 |
1980 |
1990 |
|
Commercial banks |
3,279 |
52 |
38 |
38 |
37 |
32 |
|
Life insurance companies |
1,378 |
22 |
20 |
15 |
12 |
13 |
|
Private pension funds |
1,194 |
2 |
6 |
9 |
12 |
12 |
|
S&Ls |
1,159 |
6 |
12 |
14 |
15 |
11 |
|
State & local pension funds |
753 |
2 |
3 |
5 |
5 |
7 |
|
Mutual funds |
588 |
1 |
3 |
4 |
2 |
6 |
|
Finance companies |
539 |
3 |
5 |
5 |
5 |
5 |
|
Casualty insurance companies |
507 |
4 |
5 |
4 |
4 |
5 |
|
Money market funds |
453 |
- |
- |
- |
2 |
4 |
|
Mutual savings banks |
284 |
8 |
7 |
6 |
4 |
3 |
|
Credit unions |
213 |
- |
1 |
1 |
2 |
2 |
|
Total |
10,347 |
100 |
100 |
100 |
100 |
100 |
SOURCE: Board of Governors of the Federal Reserve System, Flow of Funds Accounts, various years.
aSecond quarter for 1990. Fourth quarter for all other years.
This scenario changed abruptly after
1988. First, regulators adopted a
tougher attitude, particularly with
respect to permitting insolvent asso-
ciations to remain in operation and
to expand rapidly. Second, in 1989
Congress enacted the Financial Insti-
tutions Reform, Recovery and En-
forcement Act (FIRREA). The act
accelerated the resolution of insol-
vent associations by providing greatly
increased funds to the FDIC, so that
it could make up the shortfall be-
tween the value of the institutions’
assets and the guaranteed par value
of their deposits. The resolution of
these insolvent associations resulted
in lower deposit growth, as the exces-
sive interest paid by many of the asso-