The Savings and Loan Debacle: Moral Hazard or Market Disaster?

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The savings and loan (S&L) industry is a good place to study the causes of depository institution failure for two reasons. First, in contrast to commercial banks, the traditional S&L is a relatively simple organization. Second, cause and effect cannot be determined without outcome variation, and the S&L industry provides plenty of variation in failure rates. Figure 1 plots the failure rate of federally insured S&Ls for the years 1934–1988. for comparison, the average failure rate during the four year period 1930–1933 is also shown.1