Financial Audit: Resolution Trust Corporation’s 1995 and 1994 Financial Statements

Financial Audit: Resolution Trust Corporation’s 1995 and 1994 Financial Statements

During the 1980s, the savings and loan industry experienced severe financial losses because extremely high interest rates caused institutions to pay high rates on deposits and other funds while earning low yields on their long-term loan portfolios. During this period, regulators reduced capital standards and allowed the use of alternative accounting procedures to increase reported capital levels. While these conditions were occurring, institutions were allowed to diversify their investments into potentially more profitable, but risky, activities. The profitability of many of these activities depended heavily on continued inflation in real estate values to make them economically viable. In many cases, diversification was accompanied by inadequate internal controls and noncompliance with laws and regulations, thus further increasing the risk of these activities.
As a result of these factors, many institutions experienced substantial losses on their loans and investments, a condition that was made worse by an economic downturn. Faced with increasing losses, the industry’s insurance fund, the Federal Savings and Loan Insurance Corporation (FSLIC), began incurring losses in 1984. By the end of 1987, 505 savings and loan institutions were insolvent. The industry’s deteriorating financial condition overwhelmed the insurance fund which only 7 years earlier reported insurance reserves of $6.5 billion. In 1987, the Congress responded by creating the Financing Corporation (FICO) to provide financing to the FSLIC through the issuance of bonds. Through August 8, 1989, FICO provided $7.5 billion in financing to the FSLIC; however, the insurance fund required far greater funding to deal with the industry’s problems.

General Accounting Office

General Accounting Office

July 1996

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By |2018-01-01T00:00:00-08:00January 1st, 2018|Financial Regulation, Reference, Systemic Risk/Financial Crises|