Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) history

Better known by its short name, the FIRREA was enacted on August 9, 1989—one of the most significant laws to affect the savings and loan industry since the 1930s. The industry had been devastated by high interest rates in the early 1980s and by deterioration in asset quality in the middle to late 1980s. The major impetus behind FIRREA was to provide funds to resolve failed SAVINGS AND LOANS. But it also fundamentally changed the regulatory structure of the industry and reversed the trend toward liberalizing the powers of institutions.

FIRREA dissolved the Federal Savings and Loan Insurance Corp. (FSLIC), making the FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) the administrator of two separate insurance funds: the Savings Association Insurance Fund (SAIF), which replaced the FSLIC, and the Bank Insurance Fund (BIF). The independent FEDERAL HOME LOAN BANK BOARD (FHLBB) was replaced by the Office of Thrift Supervision (OTS), a bureau within the Treasury Department, as the regulator of savings and loans.

FIRREA established the RESOLUTION TRUST CORPORATION (RTC) to resolve failed savings and loans with funding provided primarily by taxpayers. The RTC was charged with selling assets of failed thrifts to the private sector, many sales occurring at a substantial loss from book value. To replenish SAIF, deposit insurance premiums were raised. The type and extent of activities in which savings and loans could engage was restricted, reversing federal and state legislation of the early 1980s. State-chartered institutions were restricted to those activities permitted to federally chartered institutions. Savings and loans were prohibited from purchasing JUNK BONDS and had to divest themselves of any such holdings. Commercial real estate loans were significantly restricted, as were loans to one borrower. Savings and loans were also required to hold at least 70 percent—up from 60 percent—of their assets primarily in housing-related investments.

FIRREA strengthened capital requirements for savings and loans in three regards. First, tangible capital was to be at least 1.5 percent of assets. Second, a core capital ratio of 3 percent was required. Third, an institution’s capital requirement was to be based on the risk of its portfolio.

FIRREA also substantially enhanced the enforcement powers of savings and loan regulators. They were authorized to restrict the asset growth of institutions and to order institutions to stop engaging in specific activities. Regulators were given the power to remove individuals from savings and loans for cause and to impose an industry-wide ban on their employment. Civil money penalties could also be imposed of up to $1 million a day.

FIRREA enhanced the environment in which savings and loans operated by facilitating the removal of failed institutions. However, restrictions mandating that savings and loans be more specialized home mortgage lenders impaired their ability to diversify and to participate in potentially profitable activities. The new capital requirements, moreover, were a continuation of the practice of relying and acting on the basis of accounting measures of capital rather than on market measures. Nonetheless, FIRREA has continued to have a lasting affect on the shrinking savings and loans industry.

See also DEPOSITORY INSTITUTIONS ACT.

Further reading

• Barth, James R. The Great Savings and Loan Debacle. Washington, D.C.: American Enterprise Institute, 1991. 
• Barth, James R., George J. Benston, and Philip R. Wiest. “The Financial Institutions Reform, Recovery and Enforcement Act of 1989: Description, Effects and Implications.” Issues in Bank Regulation (Winter 1990): 3–11. 
• White, Lawrence J. The S&L Debacle. New York: Oxford University Press, 1991. 

James R. Barth