The savings and loan problem in the United States

Before the late 1970s, U.S. savings and loan institutions (S&Ls) were primarily mutually-owned institutions with limited management capabilities, limited investment options, and virtually unlimited interest rate exposure. The industry was closely tied to real estate so conflicts of interest and concentrations of credit were accepted. The regulatory-supervisory system was also closely tied to the industry so it had trouble identifying problems and imposing appropriate discipline. When interest rates escalated beyond imagined levels, this borrow short, lend long industry suffered great operating losses, which depleted modest capital levels in many S&Ls. Interest rates and asset prices varied greatly, and S&Ls were constrained in their ability to diversify and hedge against risk. Prudential supervision and regulation were inadequate and were subject to pressures to liberalize the activities of institutions inexperienced in the new activities. Losses borne by the economy will be paid for by the general public. Although the U.S. has a highly sophisticated and innovative mortagage market that is not found in developing countries, the lessons of its failures in regulating and supervising the savings and loan industry are highly relevant for the many developing countries that suffer from widespread distress in their financial systems.