Savings and Loan Industry: Strategic Responses to Regulatory Change

Partial deregulation of the financial services industry has created an acute earnings squeeze for many savings and loan associations (S&L). Regulation Q of the Banking Act of 1933 enabled S&Ls to provide low-cost funds for residential mortgage lending. Most of the problems facing S&Ls today are a result of rapid changes in Regulation Q. The Depository Institutions Deregulation and Monetary Control Act in 1980 called for phasing out Regulation Q and eliminating the interest rate differentials paid by thrifts. However, the phaseout of Regulation Q went much more quickly than mandated, leaving S&Ls unable to develop strategic responses. Deregulation of S&L's assets did not keep pace with deregulation of their liabilities. Governments may need to develop more balanced deregulation that gives industries time to respond. S&Ls have developed short-term strategies to regain market share, but the success of these strategies depends on a number of uncontrollable variables, including interest rates and legislation.