Depository Institutions Act (1982) history

Also known as the Garn–St. Germain Act, named after its two congressional sponsors, Senator Jake Garn of Utah and Representative Fernand St. Germain of Rhode Island, the act was passed to aid thrift institutions. In the mid- to late 1970s and early 1980s, many thrift institutions (SAVINGS AND LOANS and savings banks) were disintermediated as savers withdrew their deposits in favor of higher yields offered by money market mutual funds. Savings deposits at thrifts, like commercial banks, were regulated by Regulation Q of the FEDERAL RESERVE, which allowed the central bank to cap the amount of interest paid. As a result, the outflow from the thrifts caused many to begin recording losses, and the entire industry recorded a net loss between 1980 and 1982.

The act allowed the thrifts to liberalize their balance sheets in favor of an expanded array of assets that could potentially yield more than a conventional mortgage. They were allowed to offer commercial loans and consumer loans in limited amounts and to acquire insurance underwriting operations. Interest rate restrictions on accounts were lifted, and they were also allowed to purchase corporate bonds, again as a specific maximum percent of their total assets. They were also allowed to invest in computer networks that provided automated teller machine facilities across state lines.

Unfortunately, in their rush to regain profits, many of the thrifts made ill-advised investments, including poor nonresidential mortgages and JUNK BONDS. Within six years, the industry again was in financial trouble, caused by defaults in the junk bond market and a weakening in the commercial real estate market. As a result, Congress passed the Financial Institutions Return, Recovery and Enforcement Act (FIRREA) in 1989, which reformed the industry and forced many of the marginal thrifts out of business. On balance, the act only temporarily saved the industry before its more liberal provisions caused the industry to fail again.

The greatest legacy of the act was to help spark the interest in junk bonds during the early and mid-1980s. The thrifts became major investors in the bonds, many of which were sold by the investment banking house DREXEL BURNHAM LAMBERT. The act remains as one of the least successful efforts at DEREGULATION in financial services passed in the 1980s.

See also DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT; FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT.

Further reading

• Barth, James R. The Great Savings and Loan Debacle. Washington, D.C.: American Enterprise Institute, 1991. 
• White, Lawrence J. The S&L Debacle. New York: Oxford University Press, 1991.