Garn-St. Germain Depository Institutions Act

The Garn-St. Germain Depository Institutions Act was enacted by Congress in 1982 to ease pressures on banks and savings and loans which increased after the Federal Reserve raised rates in an effort to combat inflation. The Act followed the establishment of the Depository Institutions Deregulation Committee, by the Monetary Control Act which had the primary purpose of phasing out interest rate ceilings on bank deposit accounts by 1986.

Inflation in the United States had spiked significantly in the mid-1970’s and again after the Federal Reserve aggressively began raising rates into the 1980's in hopes of reversing the trend. Investors flocked to mutual fund money markets to obtain higher interest rates, and corporations developed alternatives such as repurchase agreements. Traditional banks were caught in the middle as they were paying more for their deposits than they were earning on mortgage loans which had been made in earlier years at much lower interest rates. Also unable to get out from under lower rates of interest on their own long-term holdings, banks were becoming illiquid as they were unable to obtain enough deposits to fund their existing loans. At the same time, Fed Regulation Q restricted banks and savings and loans (known as S&L or thrifts) from raising their deposit interest rates.

The Garn-St. Germain Depository Institutions Act removed the interest rate ceiling for banks and thrifts, authorized them to make commercial loans, and gave the federal agencies the ability to approve bank acquisitions. Once regulations were loosened, however, S&Ls began engaging in high-risk activities to cover losses, such as commercial real estate lending and investments in junk bonds. Depositors in S&Ls continued to funnel money into these risky endeavors because their deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC).

Ultimately, the act was one of the contributing factors to the Savings and Loan Crisis which resulted in one of the largest government bailouts in U.S. history costing approximately $124 billion. Long-term consequences included the preponderance of 2/28 adjustable-rate mortgages which ultimately contributed to the sub-prime loan crisis and Great Recession of 2008.