What Have We Learned From The Thrift and Banking Crises of The 1980's?

By George G. Kaufman
Loyola University Chicago

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Introduction:

Let me skip right to the bottom line conclusion. What have we learned from the thrift and banking crisis of the 1980's? (For reviews of the 1980s crises see Barth, 1991; Barth and Litan, 1998; Kane, 1989, and Kaufman, 1995.) The academics, I think, have learned a great deal. The regulators, have also learned a great deal, but primarily in theory. In practice, the jury is still out. But, as I will argue below, it does not look promising. Do the widescale failures and resolutions of the savings and loan associations (S&Ls) and commercial banks in the 1980s provide useful perspectives for today? The answer is definitely yes.

How have I come to this conclusion? Since 1995, which sort of represents the end of the cleanup of the S&L and commercial banking mess, few banks and thrifts have failed, that is put into receivership or conservatorship by the regulators. As can be seen from Table 1, less than ten banks and thrifts failed per year, and even fewer institutions of any size failed. As of mid-2002, only three institutions with total assets of $1 billion or more have failed and none with assets of more than $2.5 billion at the date of failure. The First National Bank of Keystone (West Virginia) failed in 1999 with about $1 billion in assets. Superior Federal Savings Bank, a thrift in Chicago failed in 2001 with assets of $2.3 billion. Hamilton National Bank (Miami, Florida) failed in early 2002 with some $1.3 billion in assets. I will add a forth bank to this list that is a lot smaller, but of interest for purposes of this analysis. The Best Bank (Boulder, Colorado) with $300 million in assets failed in 1998.

So far, so good. But, although very few banks failed, things change dramatically if one looks at the cost of the failures to the Federal Deposit Insurance Corporation (FDIC) and uninsured depositors and creditors at the bank. Estimates of this loss or negative net worth of the institutions on the date of resolution are frequently made by the FDIC and reported in the press release announcing the failure. In cases where the FDIC does not report this estimate, estimates are often reported in the press based on information provided by bank analysts. The estimates are periodically updated until the resolution of the bank is completed. Relying on the most recently available credible estimates, the loss on Keystone is estimated at near $800 million or 75 percent of its assets; on Superior, $500 million to $800 million (before a payment to the FDIC by the Pritzker family, the primary owner) or 20 to 40 percent of its assets; on Hamilton $400 million (even though the Comptroller of the Currency proudly announced he had closed the bank before its risk-based capital ratio declined below 8 percent), or 30 percent of its assets; and on Best Bank, $170 million or more than 50 percent of assets. These large losses focus attention on two areas of concern where the lessons of the 1980s do not appear to have been fully learned by the regulators - - 1) effective regulatory intervention to minimize losses from failure through, among other powers, application of prompt corrective action (PCA) and least cost resolution (LCR) and 2) design of a government-sponsored deposit insurance structure that minimizes poor behavior by both banks and bank regulatory agencies. The remainder of this paper examines each of these two areas.

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