Violations of Reg O & the Federal Sentencing Guidelines

In 1973, the U.S. National Bank of San Diego went down in the history books as the first financial institution holding assets in excess of 1 billion dollars. Investigations into the U.S. National Bank discovered that over 400 million dollars in financial loans went to its chief executive officer and his related interests (Osborne, 1998). In the following years other banks began to fail with similar insider dealings being blamed. In 1977, the Safe Banking Act was introduced to deal with some of these cases. After repeated amendments and some eighteen new titles added, the Safe Banking Act of 1977 became known as the financial Institutions Regulatory and Interest Rate Control Act (FIRA). FIRA became a major upgrade to what is known as Regulation O (Reg O). More modifications to Reg O came with the passing of:

  • The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA);
  • The Housing and Community Development Act of 1992;
  • The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA).

The FDICIA requires that management of certain financial institutions must provide an assessment of their compliance with insider laws and regulations. Regulation O was designed to discourage insider’s from using their positions to secure self serving credit extensions (Osborne, 1998). Violations of Reg O can cost financial institutions a lot of money making non-compliance of Reg O not a suitable option.

Regulation O Violations

Section 215.11 of Regulation O, titled Civil Penalties, states, “Any member bank, or any officer, director, employee, agent, or other person participating in the conduct of the affairs of the bank, that violates and provision of the part (other than section 215.9) is subject to civil penalties as specified in section 29 of the Federal Reserve Act (12 U.S.C. 504) (Federal Register, 2010). Section 29, titled Civil Money Penalty, breaks down violations into three tiers and sets a maximum monetary penalty, per day, for each of the three tiers (Federal Reserve, 2008).

  • Tier 1 - Any member bank which, and any institution-affiliated party with respect to such member bank who, violates any provision of section 22, 23A, or 23B, or any regulation issued pursuant thereto, shall forfeit and pay a civil penalty of not more than $5,000 for each day during which such violation continues.
  • Tier 2 - any member bank who commits any violation that recklessly engages in an unsafe or unsound practice in conducting the affairs of such member bank; or breaches any fiduciary duty; which violation, practice, or breach is part of a pattern of misconduct; causes or is likely to cause more than a minimal loss to such member bank; or results in pecuniary gain or other benefit to such party, shall forfeit and pay a civil penalty of not more than $25,000 for each day during which such violation, practice, or breach continues.
  • Tier 3 - any member bank that engages in any unsafe or unsound practice in conducting the affairs of such credit union; or breaches any fiduciary duty; and knowingly or recklessly causes a substantial loss to such credit union or a substantial pecuniary gain or other benefit to such party by reason of such violation, practice, or breach, shall forfeit and pay a civil penalty in an amount not to exceed the applicable maximum amount of $1,000,000.

Section 29 also sets a maximum fine of no more than 1 million dollars, per day, for any of the three tiers. Each of the three tiers can be used as a measurement of risk based assessments for non-compliance. If an employee within your financial institution knowing places your operations in violation to regulation O then the price for non-compliance can be a very expensive price to pay.

Federal Sentencing Guidelines Section 8

The Federal Sentencing Guidelines Section 8 has a similar structure to Section 29. However, Section 8 goes into much more detail than Section 29. While Section 29’s tiers show how much one has to pay, Section 8 helps determine what tier an organization should fall under buy using what is known as a culpability report. (United States Sentencing Commission, 2004) Section 8, titled Sentencing of Organizations, outlines how the Judicial System should review an organization in violation of law and then determines the level at which they are culpable. This can come in handy when someone within the organization commits a crime. If the organization placed into account internal controls that would have otherwise discovered the crime then the organization could be less culpable than if the organization didn’t show due diligence or due care.


Both Section 29 and Chapter 8 allow organizations the ability to measure their risk by allowing them to understand what the monetary penalties are and what they can do to ensure they are not culpable for non-compliance. These two pieces of legislation are far from perfect and a review should be performed. For now, as compliance officers, knowing the monetary risk for violations and addressing each issue to limit your culpability is a great asset to have and can save the organization a substantial amount of money if a crime was to occur.


Federal Register. (2010, July 1). Title 12: Banks and Banking. Retrieved July 6, 2010, from

Federal Reserve. (2008, August 13). Section 29. Civil Money Penalty. Retrieved July 6, 2010, from

Osborne, P. R. (1998, June). Managing regulation O. Retrieved July 6, 2010, from;col1

United States Sentencing Commission. (2004). 2004 Federal Sentencing Guidelines. Retrieved July 6, 2010, from

By: Joseph Dustin

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Supervisory Powers over Financial Institutions

Since the onset of the housing market collapse, financial institutions have been failing at an astounding rate. As more banks begin to fail and taxpayer bailouts are passed by congress, one can only wonder if anyone is monitoring these institutions. How do we identify the causation of banking failure? Do we blame the financial institutions or the agencies that govern them for the failures? The answer may be somewhere in between and not easily defined by using current methods used in identifying failing financial institutions.

To help identify bank failures, regulatory agencies are provided with supervisory powers that allow them to examine financial institutions for safety and soundness. Are these supervisory powers that the agencies currently have adequate enough to identify a failing institution before its too late, or are the processes they use flawed? Furthermore, the examinations given to financial institution by their supervisory agency should be analyzed to further understand why the supervisory agencies fail to adequately predict banking failures.

An Increase in Bank Failures

In 2008, after years of relatively low numbers of bank failures (an average of just over 3 per year from 2000 to 2007), banks rapidly began failing. Twenty-five financial institutions failed in 2008 and this was only the tip of the iceberg (see Figure 1). In 2009, bank failures were up again, this time the industry had a total of 140 institutions that were closed. As of July 15, 2010, bank failures have reached a total of 90 for the year with no signs of stopping there. McIntyre (2010) and Scatigna (2010) are forecasting even higher numbers of bank failures this year. With high numbers of banking failures being forecasted in the near future, why could we not stop these failures from occurring and what are the supervisory agencies doing to prevent future failures from happening?


Banks generally fail for one of two reasons. First, banks can become insolvent, forcing the supervisory agency to step in a close the institution. Insolvent banks occur when the bank’s liabilities become greater than their total assets. The second reason banks fail is due to becoming illiquid. Banks that are illiquid generally have assets that equal the amount of their liabilities; however the bank has a hard time liquidating these assets to meet consumer deposit demands or withdrawals. Rather banks are failing due to being insolvent or illiquid, the supervisory agency over each institution has be able to adequately monitor banks in order to predict their failure.

Bank supervision and bank regulation are two terms that are often confused as being one and the same. The Federal Reserve (2005) defines the terms as being “distinct, but complementary, activities.” Bank supervision involves three distinct actions: monitoring, inspecting, and examination. Each action reflects a key component in assessing the overall condition of banking organizations. Organizations found violating the laws that fall within the regulatory agency’s jurisdiction can have formal or informal actions taken against them to rectify the problems. Bank regulation involves the creation of regulations and guidelines that cover the day to day activities of banking organizations.

Authority to Impose Regulatory Enforcement Action

Regulatory Agencies have a vast range of powers that enable them to deal with troubled institutions with the end result of catching problems early in an effort to minimize more costly supervisory measures further down the road (Malloy, 2003). Some of the regulatory agencies with powers over financial institutions are the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS). pastedGraphic.pdfpastedGraphic_1.pdf

Malloy (2003) states that the enforcement provisions of the Federal Deposit Insurance Act (FDIA) are “applicable regardless of the type of depository institution involved” and “is now a more or less unified body of federal enforcement provisions.” Figure 2 breaks down each supervisory agency’s enforcement actions over the last ten years.

The OCC has supervisory powers over national banks. The Comptroller is given the authority to examine these institutions through the Federal Deposit Insurance Act (FDIA). The FDIA allows the OCC a way to discover unlawful violations that are considered “unsafe and unsound practices” of national banks during examinations. Institutions under the supervision of the OCC may be required, but not limited to, pay “any deficiencies in capital” or increase the amount of capital that is required (Malloy, 2003). The OCC may also impose personal liabilities against management when violations under the National Bank Act occur.

The FRB has supervisory authority over state chartered banks that are members of the Federal Reserve System, Bank Holding Companies (BHC), Edge and agreement corporations, foreign branches of member banks, and other nonbanking activities of foreign banks (Federal Reserve's Publication Committee, 2005). The FRB, under the Federal Reserve Act, has the ability to impose civil money penalties upon the bank’s directors and officers.

The FDIC has supervisory authority over banks that are not members of the Federal Reserve System. The FDIC insures bank deposits up to a set amount and has special examination authority to determine the condition of an insured bank or savings association for insurance purposes (Federal Reserve's Publication Committee, 2005). The FDIC is the federally designated receiver which allows it to liquidate banks that become insolvent (Malloy, 2003).

The OTS has supervisory authority over savings associations that generally focus on residential mortgage lending (Federal Reserve's Publication Committee, 2005). The OTS also supervises federal savings associations along with companies that own or control other savings associations. Some of the enforcement provisions carried out by the OTS are administrative cease and desist orders, suspend or remove members of management, and impose civil money penalties (Malloy, 2003).

The regulatory agencies are further streamlined by the Uniform Financial Institutions Rating System (UFIRS). UFIRS was adopted by the Federal Financial Institutions Examination Council in 1979 and was introduced to create an evaluation and rating system for financial institutions. UFIRS is based on the evaluation and rating of six key indicators. The six components used are Capital adequacy, Asset quality, Management capability, Earning, Liquidity, and the Sensitivity to market risk; otherwise known as CAMELS (Rau, FDIC's Controls Over the CAMELS Rating Review Process (Report No. AUD-08-014), 2008). Even with the CAMELS ratings, supervisory agencies are not catching bank failures fast enough to prevent such an occurrence. This is evident when both the FDIC and the OTS examined IndyMac Federal Bank, FSB (IndyMac) of Pasadena, California.

IndyMac Federal Bank, FSB

The supervisory responsibility, over IndyMac, rested on the shoulders of the Office of Thrift Supervision (OTS). OTS closed IndyMac on July 11, 2008 and named the Federal Deposit Insurance Corporation as conservator (Office of Inspector General, 2009). According to the Audit Report published by the Department of the Treasury and conducted by the Office of Inspector General (OIG) states, “IndyMac’s failure [was] largely associated with its business strategy of originating and securitizing Alt-A loans on a large scale.” IndyMac had an aggressive strategy to increase profits, by using nontraditional loan products, insufficient underwriting, and borrowed heavily from costly sources. After 2007, in the mitts of the mortgage market decline, IndyMac was left holding $10.7 billion in loans. As the bank became illiquid, the situation took a turn for the worse when account holders created a “run” of $1.55 billion in deposits that left IndyMac with no way to liquidate their assets to cover their liabilities. The OIG made it clear that, “the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated.” If IndyMac’s business strategy is to blame for the closing of IndyMac, why didn’t the FDIC and OTS uncover this strategy before it was too late?

Rating the Banks

Each regulatory agency needs to be able to efficiently monitor the conditions of banking institutions that they supervise. Two ways agencies can achieve this goal is to conduct onsite and offsite examinations. The FDIC, under section 10(d) of the Federal Deposit Insurance Act (12 USC 1820(d)) mandates onsite examinations on an annual basis. This interval may be extended to 18 months for lower asset institutions and if the FDIC relies upon examinations conducted at the state level, then the process could be extended out to 3 years (Rau, 2002).

To better bridge the gap between onsite examinations, the FDIC uses several forms of offsite monitoring tools such as the Statistical CAMELS Offsite Rating (SCOR) review program, the Growth Monitoring System (GMS), and the Real Estate Stress Test (REST). In 2002, the Office of Inspector General conducted an audit titled, Statistical CAMELS Offsite Rating Review Program for FDIC-Supervised Banks; this audit was delivered to Michael J. Zamorski, Director of the Division of Supervision and Consumer Protection. The audit set out to determine the effectiveness of the SCOR review program. Upon completion of the audit several key factors began to emerge (Rau, 2002).

  • A time lag of up to 4 ¼ months exists between the date of the Call Report and the subsequent offsite review;
  • The SCOR system depends on the accuracy and integrity of Call Report information to serve as an early warning between examinations;
  • The SCOR system cannot assess management quality and internal control or capture risks from non-financial factors such as market conditions, fraud, or insider abuse; and
  • DSC case managers rarely initiate follow-up action to address probable downgrades indentified by SCOR outside of deferring to a past, present, or future examination.

The SCOR review program is dependent on the management’s ability to accurately submit the Call Report data (Rau, 2002) The FDIC’s assesses management’s ability through onsite examination and because onsite examinations can take place up to 3 years apart, management review is left to the integrity of the reporting financial institution’s integrity. Some of the comments from examinations over management quality were (Rau, 2002):

  • Board oversight and executive officer performance
  • Management supervision is unsatisfactory, and senior management’s ability to correct deficiencies in a timely manner is questionable
  • President and senior management engaged in new and high-risk activities without sufficient Board supervision, due diligence, and adequate policies.
  • Board supervision of the bank’s subprime lending is inadequate.

In 2008, another audit report was conducted by Zamorski titled, FDIC’s Controls Over the CAMELS Rating Review Process. The audit report states that, “the purpose of conducting a risk management examination is to assess an institution’s overall financial condition, review management practices and policies, monitor adherence with banking laws and regulations, review internal control systems, identify risks, and uncover fraud or insider abuse.” After the OIG audit was conducted, they concluded that the Division of Supervision and Consumer Protection (DSC) should revise the Case Manager Procedures Manual in order to better track changes in the CAMELS ratings. These changes are necessary in providing a more accurate evaluation and rating of an institution’s financial condition and operations (Rau, 2008). The OIG also believes that the CAMELS review process is still viable for detecting at risk banks.

Although onsite CAMELS ratings are said to be reliable, the rate at which the rating deteriorates varies. The DSC has also stated that, “that the SCOR system cannot assess management quality and internal control or capture risks from non-financial factors such as market conditions, fraud, or insider abuse (Rua, 2002).” If the lack of quality in a bank’s management staff are the leading causes of bank failures, then how can we improve upon an early prediction model’s ability to ferret out such moral hazards? Barr, Seiford, and Siems (1994) believe that by using the data envelopment analysis (DEA) as an early prediction model the accuracy of prediction is significantly increased. DEA is a management quality metric designed to give early prediction models the missing M in the CAMEL rating system. The past results from an analysis of 930 banks conducted over a 5 year time frame validates the metric and confirms that the quality of management is crucial to a bank’s failure (Barr, Seiford, & Siems, 1994) The research also revealed that the statistical data relating to the management’s quality could be seen “up to three years prior to failure.”


Regulatory agencies conducting supervisory and regulatory oversight over the financial industry must continue to improve upon the processes involved in predicting bank failures. Evidence indicates that the quality of a bank’s management is a leading indicator in predicting bank failures. Onsite evaluations are more reliable due to having a more accurate assessment over a bank’s management. Although offsite evaluations are not as reliable as onsite evaluations, they provide a way for supervisory agencies to fill in the gap between onsite evaluations. Evidence also indicates that early prediction models using a method that includes management quality will offer higher rates of predictability. Further analysis on improving the detection of moral hazard is warranted and should be conducted in order to improve the overall quality of our banking system.

Upon completion of this case study, another six banks failed on July 16th 2010, bringing the total of failed institutions to 96 for the year. Three of these bank failures were in Florida, a state that has been hit particularly hard when it comes to bank failures. The future of our financial industry maybe uncertain and reform may be the only option for many financial institutions on the government’s watch list.


Barr, R. S., Seiford, L. M., & Siems, T. F. (1994, Dec 1). Forecasting Bank Failure : A Non-Parametric Frontier Estimation Approach. Retrieved July 15, 2010, from

FDIC. (2010, July 9). Failed Bank List. Retrieved July 15, 2010, from

Federal Reserve's Publication Committee. (2005, July 5). The Federal Reserve - Purposes & Functions. Retrieved July 15, 2010, from

Lee, S. J., & Rose, J. D. (2010, May). Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009. Retrieved July 15, 2010, from

Malloy, M. P. (2003). Principles of Bank Regulation second edition. St. Paul, MN: West Group.

McIntyre, D. A. (2010, February 6). Bank Failures In 2010 May Hit 200, Up More Than 40%. Retrieved July 15, 2010, from

Office of Inspector General. (2009). Material Loss Review of IndyMac Bank, FSB (OIG-09-032) Audit Report. Washington, DC: Department of the Treasury.

Rau, R. A. (2008). FDIC's Controls Over the CAMELS Rating Review Process (Report No. AUD-08-014). Arlington, VA: Office of Inspector General - FDIC.

Rau, R. A. (2002). Statistical CAMELS Offsite Rating Review Program for FDIC-Supervised Banks. Washington, D.C.: Office of Inspector General - FDIC.

Scatigna, L. (2010, January 2). Financial Physician’s 2010 Forecast. Retrieved July 15, 2010, from

By: Joseph Dustin

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The Benefits of the FFIEC and CSBS

The United State’s banking system is a highly complex banking system. To help regulate these financial institutions, six primary regulatory agencies were created to address issues within the system. The six regulatory agencies are the Board of Governors of the Federal Reserve System (The Fed); the Federal Deposit Insurance Corporation (FDIC); the Office of Thrift Supervision (OTS); the Comptroller of the Currency (OCC); the National Credit Union Administration (NCUA), and State Regulators. Within the current regulatory environment over banking activities, regulatory functions performed by the state and federal regulators may be divided into three broad categories: Chartering, Supervision, and Examination (Malloy, 2003). Each regulatory agency plays a specific role in the regulatory environments listed above. However, with each regulatory agency creating policy within their own silos, financial institutions will pay the ultimate price for the non-standardization between the regulatory agencies. To help with this problem of a non-standardized system, the Federal Financial Institutions Examination Council (FFIEC) was established.

The FFIEC was established on March 10, 1979 as part of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRA). The Appraisal Subcommittee (ASC) was established in 1989 as part of the Financial Institutions Reform, recovery and Enforcement Act of 1989 (FIRREA). The ASC’s powers grew in 1980 when the Housing and Community Development Act was passed. This act gave the ACS the responsibility to facilitate public access to data that depository institutions must disclose under the Home Mortgage Disclosure Act of 1975 (HMDA) (FFIEC, 2010). The Council is empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions for the federal examination of financial institutions in each of the federal regulatory agencies and to make recommendations to promote uniformity in the supervision of financial institutions (FFIEC, 2010).

With the FFIEC helping the federal regulatory agencies with their day to day tasks and helping to recommend and promote uniformity, who is looking at for the local interest of the state banks? The Conference of State Banks Supervisors (CSBS) has been positioned as the only national organization dedicated to protecting and advancing our nation’s dual banking system (CSBS). In 2006, the State Liaison Committee (SLC) was added to the FFIEC as a voting member, which the CSBS is a part of. The CSBS has a number of roles that it performs for the state banks. Some of those roles are (CSBS, 2010):

  • Optimize the authority of individual states to determine the activities of their financial institutions.
  • Enhance the professionalism of state banking departments and their personnel.
  • Represent the interests of the state banking system to federal and state legislative and regulatory agencies.
  • Ensure that all banks continue to have the choice and flexibility of the state charter in the new era of financial modernization.

The FFIEC is like a one stop shop for financial information and reporting for the banking industry. One of the services that the FFIEC offers is the Rating Systems. Ratings known as the Uniform Financial Institutions Rating system, which is referred to as CAMELS rating, evaluates and rates all financial institutions under the FFIEC. The CAMELS rating highlights six different areas of bank performance, Capital adequacy, Asset quality, Management administrations, Earning, Liquidity, and Sensitivity to market risk (OCC, 2008). This rating system allows for a better approach to accessing the stability of the banking system as a whole. With the ability to access banks the FFIEC provides a crucial service the each regulatory agency.


Both the FFIEC and the CSBS play a crucial part in our banking system. As we move on in this ever unfolding financial crisis that we find ourselves in, will these two organizations continue to be effective in today’s world? Is the creation of these two agencies a sign that government has gotten two big and reform is hopeless unless it simplifies the processes that take place? With new reform coming, only time will tell if politicians did enough to make sure the future of banking will be here for the next generation.


CSBS. (n.d.). About the CSBS. Retrieved July 1, 2010, from

CSBS. (2010). Retrieved July 1, 2010, from CSBS Works To:

FFIEC. (2010, March 9). About the FFIEC. Retrieved July 1, 2010, from

Malloy, M. P. (2003). Principles of Bank Regulation Second Edition. St. Paul, MN: West Group.

OCC. (2008, April). A guide to the National Banking System. Retrieved July 1, 2010, from

By: Joseph Dustin

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DIDMCA - Deregulation and its Significance

During the late 1970s people who saved their money at mortgage lending institutions began withdrawing their deposits from these institutions. The disadvantages of saving in the mortgage lending institutions were hurting the investor’s returns. In order to achieve more profitable returns, these traditional savers started investing in high-yield money market mutual funds and other various markets (Brewer III, 1980). With money leaving the mortgage lending institutions, the housing markets were being squeezed. This squeeze on banks, felt in some states, caused banks to cut off credit to households, farmers, and small businesses. Also, during this time only depository institutions were required to maintain non-interest bearing reserves with the Federal Reserve Bank (Allen & Wilhelm, 1988). This caused a record number of banks giving notice of leaving the Federal Reserve in order to be more competitive in the markets. Toward the end of the 1970s inflation was at a high level along with the interest rates. The culmination of these events along with other events called for new legislation to be written.

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) was signed into law by President Jimmy Carter on March 31, 1980. DIDMCA was considered, by many, as the largest change in the financial industry since the Federal Reserve Act in 1913. Two of the major sections of DIDMCA are Titles I and II. Title I, known as the Monetary Control Act of 1980, sets new standards in reporting requirements, reserve requirements, pricing for services, and sets effective dates. Title II, known as the Depository Institutions Deregulation Act of 1980, sets to create establishment and authority of committee, give directive to the committee, establish targets, reports, and termination of deposit interest rate ceilings (Federal Reserve Bank of Boston, 1980). DIDMCA also allowed the Savings and Loans Institutions to invest up to 20 percent of their assets in consumer loans, commercial paper, and corporate debt securities (Allen & Wilhelm, 1988) (Visser & Wu, 1989) (Moysich, 1997).

Empirical research conducted by Allen and Wilhelm (1988) assesses the impact of DIDMCA within three different types of depository institutions. Allen and Wilhelm used intervention analysis on each portfolio, FRS banks, non-FRS banks, and Savings & Loans (S&Ls). The study concluded that the FRS banks exhibited a gain of 3.9 percent and the non-FRS and S&L’s portfolios lost 4.3 percent and 4.4 percent, respectively. This research indicates that the passage of the DIDMCA, in one respect, was a way to redistribute wealth back into the FRS banks at the expense of S&Ls and non-FRS banks. However Allen and Wilhelm’s research only focused on weekly returns for 179 weeks before and only 30 weeks after the enactment of DIDMCA on March 31, 1980. A better example may come from a long term study of the industry.

Other research, such as Visser and Wu’s (1989) study on the effects of deregulation on bank stock price-earnings ratios (P/Es), set to determine the price-earnings ratios within the banking industry after a major legislative event, like DIDMCA. The study was run over a 10-year period, from 1976 to 1985. The study highlights the variables known to influence P/Es and of the nine titles of DIDMCA only Title IV appeared to have unambiguously negative effects on the P/Es of large banks. Title IV increased the powers of thrifts, which potentially can lower expected earnings for banks as thrifts penetrate their markets. Visser and Wu concluded that the DIDMCA significantly raised the P/Es of large banks, caused them to fluctuate more, and fundamentally changed the way in which they are determined. With P/Es raising investors are left paying more for each unit of stock.

DIDMCA increased the amount of deposit insurance covered by the FDIC from $40,000 to $100,000. This increase in insurance allow for an increase of risk and “moral-hazard.” This increase of the FDIC insurance and deposits interest rates were established to alleviate disintermediation, or the flow of deposits out of financial institutions into money market mutual funds and other investments (Moysich, 1997). The deregulation and increase of “moral hazard” lead to a growth in the S&L industry. From 1980-86 the S&L industry saw a rise of nearly 500 new charters, and the S&L stock contributed to 21 percent of the industry. The percentage of S&L assets in mortgage loans, from 1981-1986, dropped from 78 percent to 56 percent. S&L assets were insolvent and a bailout was not too far away.


With the onset of increasing competitions between the different financial institutions, investors pulling deposits out of deposit institutions for more lucrative returns, banks pulling out of the Federal Reserve, and decades without financial reform, the need for a financial overhaul was inevitable. Starting from the beginning of the 1980’s, deregulation and moral hazard lead to S&L crisis. As congress fights on to create a new set of financial reform, I hope they have all learned that deregulation is not reform. I believe banks need to be able to fail; this will separate the strong from the weak. If people wish to gamble their money in risky stocks then they should be able to lose, after all it’s a gamble not certainty.


Allen, P. R., & Wilhelm, W. J. (1988). The Impact of the 1980 Depository Deregulation and Monetary Control Act on Market Value and Risk: Evidence from the Capital Markets. Jorunal of Money, Credit, and Banking , 364 - 380.

Brewer III, E. (1980, September 11). The Depository Institutions Deregulation and Monetary Control Act of 1980. Retrieved June 22, 2010, from

Federal Reserve Bank of Boston. (1980). Depository Institutions Deregulation And Monetary Control Act of 1980. Retrieved June 22, 2010, from

Moysich, A. (1997). The Savings and Loan Crisis and Its Relationship to Banking. Retrieved June 22, 2010, from

Visser, J. R., & Wu, H.-K. (1989). The Effects of Deregulation on Bank Stock Price-Earnings Ratios. Financial Analysts Journal , 62 -67.

By: Joseph Dustin

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