Definition
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) is a United States federal law passed in 1989 designed primarily to address the failures in the savings and loan industry. It reformed how savings and loan associations (S&Ls) are regulated and insured, instituted stricter regulatory oversight, and set up mechanisms to deal with S&Ls that were failing.
A primary aspect of FIRREA was to manage the acute crisis of the 1980s, where numerous S&Ls became insolvent due to risky loan practices and poor economic conditions. The act aimed both to manage the immediate fallout and to institute longer-term reforms to prevent a recurrence.
Examples
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Resolution Trust Corporation (RTC): FIRREA established the Resolution Trust Corporation, tasked with handling the assets of defunct S&Ls. The RTC was responsible for selling these assets to mitigate losses and recoup some funds for taxpayers.
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Federal Deposit Insurance Corporation (FDIC): FIRREA expanded the responsibilities of the FDIC to include insuring and regulating remaining and future savings and loan associations. It abolished the Federal Savings and Loan Insurance Corporation (FSLIC), bringing clearer regulatory oversight and alignment with commercial banks’ regulations.
Frequently Asked Questions
What was the main objective of FIRREA?
The primary objective of FIRREA was to restructure and reform the savings and loans industry in the wake of the 1980s crisis, providing a stronger regulatory framework and mechanisms to handle failing S&Ls, ensuring depositors’ funds were protected.
How did FIRREA impact the regulatory bodies?
FIRREA dissolved the Federal Savings and Loan Insurance Corporation (FSLIC) and transferred its functions to the Federal Deposit Insurance Corporation (FDIC). It also created the Office of Thrift Supervision (OTS) and the Federal Housing Finance Board (FHFB) to oversee the industry more stringently.
What role did the Resolution Trust Corporation (RTC) play?
The RTC was responsible for managing and disposing of the assets of failed savings and loan institutions, mitigating losses, and recovering funds to protect taxpayers.
Did FIRREA completely resolve the S&L crisis?
While FIRREA significantly mitigated the crisis and introduced vital measures to prevent recurrence, it was more effective in damage control and long-term regulatory enhancements than in addressing all underlying issues instantaneously.
How long were the measures enacted by FIRREA in effect?
Some provisional measures, like the operations of the Resolution Trust Corporation, were temporary, lasting until the S&L industry stabilized. However, many regulatory reforms were permanent and carried forward into modern regulatory practices.
Related Terms
- Savings and Loan Crisis: A financial crisis during the 1980s where about one-third of S&Ls in the United States failed due to mismanagement, deregulation, and economic downturns.
- Federal Deposit Insurance Corporation (FDIC): A federal agency that insures deposits at banks and thrifts, aiming to maintain stability and public confidence in the financial system.
- Office of Thrift Supervision (OTS): A former federal agency under FIRREA created to regulate and supervise savings and loan associations (abolished in 2011 and functions transferred to the Office of the Comptroller of the Currency).
- Resolution Trust Corporation (RTC): A temporary federal agency established to manage and dispose of the assets from failed savings and loan institutions.
Online Resources
- Federal Deposit Insurance Corporation (FDIC): FDIC.gov
- FinancialCrimesInc: Key Articles and Background
- Office of the Comptroller of the Currency (OCC): History and Documents
- Resolution Trust Corporation Archive: RTC.gov Archive
References
- Carnell, R. S., Macey, J. R., & Miller, G. P. (2017). The Law of Financial Institutions. Wolters Kluwer.
- Mayer, M. (1990). The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry. Scribner.
- Barth, J. R., Brumbaugh, R. D., & Wilcox, J. A. (2000). The Savings and Loan Crisis: Lessons from a Regulatory Failure. Senior Scholars.
Suggested Books for Further Studies
- The Savings and Loan Crisis: Lessons from a Regulatory Failure by James R. Barth, R. Dan Brumbaugh Jr, and Robert E. Litan.
- The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry by Martin Mayer.
- Practicing Financial Planning for Professionals by Sid Mittra, Anandi P. Sahu, and Thomas W. Chacko.
- Managing and Understanding Financial Risk by John A. Hull.
