1. How did the two pieces of regulatory legislation, DIDMCA in 1980 and DIA in 1982, change the operating profitability of savings associations in the early 1980s? What impact did these pieces of legislation ultimately have on the risk posture of the savings association industry? How did the FSLIC react to this change in operating performance and risk? First of all this two pieces of legislation allowed savings associations to offer new kind of deposit accounts, such as NOW accounts allowed by DIDMCA which could be offered nationwide and Money Market Deposit Account allowed by DIA. The main reason to let savings associations to offer those accounts is because they want to reduce the net withdrawal flow of deposits so that they could reduce the liquidity problem.
Additionally, the regulatory allowed institutions to charge any loans interest rates they choose. It will definitely change the operating profitability of savings associations since they could decide the interest rates so they will definitely take the advantage to maximize their profits by giving out the highest interest rate and attract people to deposit their money in the banks and use those money loan to risky projects in order to get more payments back from the projects. Savings associations in the early 1980s not only could do mortgage loan after the regulatory they also do commercial, consumer and industry loan and even buy bonds (no restrict on which kind of bonds.) A
lthough many savings associations were safer, and more profitable, the FSLIC did not close many of the savings associations, which were facing bankrupts. And, many of savings association (actually a lot of them) went bankrupt during that time because those savings association industry do not really know the savings loans so they make many loans, most of them failed eventually. FSLIC should assess higher insurance premiums on companies that were in high-risk categories but FSLIC did not make that decision which let them face bankrupt eventually. 2. How did the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991 reverse some of the key features of earlier legislation?
FIRREA abolished the FSLIC and created a new savings association insurance fund (SAIF) under the management of the FDIC. It also replaced FHLB with Office of Thrift Corporation. FHLB is no longer has powers to regulate the nationals banks. Additionally, FIRREA created a government agency called Resolution Trust Corporation the main job they did is taking assets from failed savings associations and sell them off to pay off depositors without trying to cost tax payers too much.
The Federal Deposit Insurance Corporation Improvement Act introduced risk- based deposit insurance premiums, which will reduce banks to accept projects that excess risk- taking. It also introduced prompt corrective actions that allow regulators to close banks more quickly. The last but not the least, this Act also extended federal regulation and powers over foreign bank branches and agencies.
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