Didmca and Fslic
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.) Although 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
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.) Although 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