What was the Garn-St. Germain Depository Institutions Act?
Congress passed the Garn-St-Germain Depository Institutions Act in 1982. The main goal was to relieve bank, savings, and loan pressures after the Federal Reserve hiked rates to fight inflation. When the Fed raised deposit interest rates in the early 1980s, financial firms that had made low-rate loans faced negative spreads.
Before the legislation, the Monetary Control Act (MCA) established the Depository Institutions Deregulation Committee to remove bank deposit account interest rate limitations. Contemporary opinion holds that these behaviors contributed to the 1980s and 1990s Savings and Loan Crisis.
Understanding the Garn-St. Germain Depository Institutions Act
After Nixon severed the dollar-gold connection, inflation rose to 10% by early 1980. The Fed rapidly hiked rates under Chairman Paul Volcker, keeping inflation between 2.5 and 5.0% for most of the 1980s.
They paid more for deposits than they earned on mortgage loans made years earlier at lower rates, putting conventional banks in the middle. They risked huge interest rate risks from maturity mismatching, low-rate home loans, and volatile bank deposit rates. Banks were illiquid due to lowering long-term fixed-rate interest rates.
The MCA also eliminated Fed Regulation Q, which banned banks and S&Ls from raising deposit interest rates for non-checking accounts. Businesses created buyback agreements while investors and depositors sought high-interest rates in money market mutual funds, CDs, and savings accounts. Banks struggled when deposit rates rose and mortgage interest remained unchanged.
Title VIII of the Garn-St. Germain Depository Act, “Alternative Mortgage Transactions,” lets banks lend adjustable-rate mortgages. The statute also permitted consumer real estate owners to place mortgaged property in inter-vivos trusts without triggering the due-on-sale clause, which lets banks foreclose and collect the amount. The wealthy may protect their real estate from creditors and judicial settlements and pass it on to their children and heirs. Many commentators believe the Act contributed to the Savings and Loan (S&L) Crisis, which resulted in a $124 billion government bailout.
Passage of Act
Democrat Congressman Fernand St. Germain of Rhode Island and Republican Senator Jake Garn of Utah sponsored the Garn-St. Germain Depository Institutions Act. Congressman Steny Hoyer and Senator Charles Schumer co-sponsored the measure. The House overwhelmingly approved the bill (272–91). President Reagan signed the law in October 1982 after the Senate passed it.
Unexpected Results
Garn-St. Germain Depository Institutions Act cut interest rates, enabled commercial loans, and opened bank acquisitions to government approval. When regulations were relaxed, S&Ls countered losses with high-risk activities, including commercial real estate loans and junk bonds.
The Federal Savings and Loan Insurance Corporation protected S&L deposits, so they kept investing in riskier ventures.
Many believe the measure contributed to the Savings and Loan Crisis, which resulted in a $124 billion government bailout. The prevalence of 2/28 adjustable-rate mortgages may have contributed to the 2008 subprime credit crisis and the Great Recession.
Conclusion
- The Garn-St. Germain Depository Institutions Act reduced bank pressure and inflation.
- This law honors Congressman Fernand St. Germain and Senator Jake Garn. Senator Charles Schumer and Rep. Steny Hoyer co-sponsored.
- Title VIII of the Garn-St. Germain Depository Act authorizes banks to provide adjustable-rate mortgages.
