U Explanations for the Increased Riskiness of Banks in the 1980 s

NTEREST IN BANKING MATTERS surged in the 1980s, when the U.S. banking system experienced considerable difficulties after several decades of stability. During the decade, the number of bank failures increased sharply, and banks in general experienced increasing problem loans and dwindling capital. Most banks recovered their financial strength in the early 1990s thanks to improved economic conditions and low short-term interest rates that increased interest margins. With the recovery of the banking sector, public interest in bank failures is fading, but many questions remain unanswered. To effectively prevent repetition of the banking turmoil, it is important to study the fundamental causes of the sudden deterioration of the financial health of the banking system in the 1980s. Without recognizing the causes, future banking policies intended to improve the safety and soundness of the banking sector might produce more unintended effects than intended ones.