Business Glossary

legislation enacted into law on August 9, 1989, to resolve the crisis affecting U.S. savings and loan associations. Known as the bailout bill, it revamped the regulatory, insurance, and financing structures and established the Office of Thrift Supervision. The act created (1) the Resolution Trust Corporation (RTC), which, operating under the management of the Federal Deposit Insurance Corporation (FDIC), was charged with closing or merging institutions that had become insolvent beginning in 1989; (2) the Resolution Funding Corporation (REFCORP), charged with borrowing from private capital markets to fund RTC activities and to manage the remaining assets and liabilities taken over by the Federal Savings and Loan Insurance Corporation (FSLIC) prior to 1989; (3) the Savings Association Insurance Fund (SAIF) (pronounced "safe"), to replace FSLIC as insurer of thrift deposits and to be administered by the FDIC separately from its bank deposit insurance program, which became the Bank Insurance Fund (BIF); and (4) the Federal Housing Finance Board (FHFB), charged with overseeing the federal home loan banks.

The RTC was authorized to accept additional insolvent institutions through June 1995; after that date, responsibilities for newly failed institutions shifted to the SAIF.

federal legislation of 1989 providing government funds to insolvent savings and loan associations, and mandating sweeping changes in the examination and supervision of savings and loans. The act required savings and loans to adopt new capital standards, transferred the regulatory powers of the Federal Home Loan Bank Board to a new agency, the office of thrift supervision, a bureau within the U.S. Treasury Department; and placed the 12 district Federal Home Loan Banks under control of an oversight board, the Federal Housing Finance Board, The act also abolished the defunct Federal Savings and Loan Insurance Corporation (FSLIC).

Among its major provisions:

(1) established two new federal deposit insurance funds, the Bank Insurance Fund, insuring deposits in commercial banks, and the Savings Association Insurance Fund, insuring deposits in savings institutions, up to $100,000 per account. Both funds are to be managed by the Federal Deposit Insurance Corporation.

(2) authorized a new federal agency, the resolution funding corporation (REFCORP), to finance the liquidation of insolvent savings associations. Refcorp issued $30 billion in zero coupon bonds with funds from the retained earnings of the Federal Home Loan Banks. An additional $20 billion in closing insolvent thrifts was raised directly by the U.S. Treasury Department through the sale of Treasury obligations.

(3) established a new federal agency, the Resolution Trust Corporation (RTC), to dispose of assets of failed savings associations. The RTC's activities as liquidator of defunct S&Ls will be financed by securities issued by the Resolution Funding Corporation, direct Treasury borrowings, and assessments on the district Federal Home Loan Banks.

(4) expanded the board of directors of the Federal Deposit Insurance Corporation from three to five members, including the director of the Office of Thrift Supervision, and two others appointed by the President and confirmed by the Senate.

(5) required savings and loans to meet minimum capital standards: tangible capital of 1.5% of total assets, "core capital," which is tangible capital plus goodwill equal to 3% of total assets that may have been acquired in a merger; and risk-based capital equal to 6.4% of risk-weighted assets (rising to 8% after January 1, 1993). goodwill was excluded from inclusion in core capital after 1994.

(6) authorized a new insurance logo for savings and loans including the words "backed by the full faith and credit of the United States Government."

(7) required savings and loans to meet a new "qualified thrift lender" test of 70% of portfolio assets in residential mortgages or mortgage related securities.

(8) raised deposit insurance premiums paid by commercial banks and premiums paid by savings and loans to recapitalize the federal deposit insurance funds.

(9) permitted commercial banks and savings and loans to acquire financially sound savings associations in other states.

(10) permitted banking regulators to seize assets of healthy banks when an affiliated bank becomes insolvent.

(11) banned, with certain exceptions, savings and loans from converting from the Savings Association Insurance Fund to the Bank Insurance Fund for a five-year period ending in 1994.

(12) required savings associations to adhere to the same risk-based capital standards as national banks.

(13) required savings associations to adhere to the same lending limit in loans to a single borrower as national banks: a legal loan limit equal to 15% of capital in unsecured loans and 25% of capital in secured loans.

(14) required savings associations to divest their holdings in junk bonds by July 1, 1994, and generally follow the same investment guidelines as commercial banks. Junk bonds and direct investments of savings and loans must be held in separately capitalized subsidiaries.

(15) permitted the district Federal Home Loan Banks to accept commercial banks as member institutions and make credit advances to commercial banks with at least 10% of assets in residential mortgages.

(16) banned the use of brokered deposits by savings associations failing to meet minimum capital requirements.

(17) required the district Home Loan Banks to establish an Affordable Housing Program, and pledge a percentage of their retained earnings to mortgages to low income borrowers.

(18) banned tax breaks to acquirers of insolvent savings associations.

(19) directed the Treasury Department and the General Accounting Office to conduct studies of risk-based deposit insurance, market valuation accounting, and other matters.

(20) allowed commercial banks to market bank services directly to nonbank affiliates and bank-owned affiliates.

(21) restructured the Federal Home Loan Mortgage Corporation as a stockholder owned corporation with an 18-member board of directors. Holders of Freddie Mac preferred stock were authorized to exchange shares of preferred stock for voting common stock.

(22) amended the Home Mortgage Disclosure Act to require mortgage lenders to collect and report to their primary regulator data on mortgage activities by census tract.

(23) amended the Community Reinvestment Act to require federal banking regulators to disclose lender compliance annually on an A-B-C-D scale.

(24) directed that real estate appraisals comply with state certification and licensing standards.

(25) expanded the enforcement powers of banking regulators, authorizing banking agencies to assess civil money penalties up to $1 million a day and criminal penalties up to $5 million a day, and added bank fraud to crimes covered under the Racketeer Influenced and Corrupt Organizations Act (RICO).

a federal law passed in 1989 that restructured the regulatory and deposit insurance apparatus dealing with savings and loan associations and changed the rules under which federally regulated S&Ls operate.

Example: The FIRREA was intended to address the major problem of failing S&Ls due to mounting nonperforming loans held in portfolio, as well as to make reforms that would prevent the problem from recurring. Often referred to as the "S&L bailout," the law represents a large expenditure of federal funds to pay off depositors at failed associations. The law also created the Resolution Trust Corporation, which is charged with managing and liquidating the assets of associations seized by the government. The Federal Savings and Loan Insurance Corporation was abolished by the law, and its insurance and regulatory responsibilities were brought under the Federal Deposit Insurance Corporation, which also insures commercial banks.