Resolution Trust Corporation

Background

The Resolution Trust Corporation (RTC) was established as a US federal agency tasked with handling and resolving the bankruptcy of savings and loan institutions (also known as “thrifts”) during the 1980s financial crisis. These thrifts had become insolvent due to widespread misconduct, high-risk lending, and regulatory failures, which undermined the broader financial system.

Historical Context

The thrifts crisis culminated in significant financial losses and a lack of public confidence in these institutions. Recognizing the need for a comprehensive solution, Congress created the RTC in 1989 under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The RTC was primarily funded by the federal government and operated under the supervisory eye of the Federal Deposit Insurance Corporation (FDIC).

Definitions and Concepts

The Resolution Trust Corporation (RTC) was a US federal agency mandated to liquidate assets and liabilities of insolvent thrifts. The term “thrift” generally refers to savings and loan associations, mutual savings banks, and credit unions.

Major Analytical Frameworks

Classical Economics

Classical Economics generally presupposes that markets are self-regulating. The thrift crisis was seen as evidence of regulatory intervention being necessary to address Market Failures.

Neoclassical Economics

From a Neoclassical standpoint, the role of RTC supports that efficient management and liquidation of bad assets can restore equilibrium in the financial sectors of the economy.

Keynesian Economic

Keynesian Economics might interpret RTC as an essential government intervention to stabilize an economy during a crisis-driven period and to restore liquidity and trust in the financial market.

Marxian Economics

In Marxian Economics, the formation of the RTC could be seen within the context of capitalism’s instability, emphasizing the systemic crises inherent in capitalist economies which often require government intervention.

Institutional Economics

The creation of RTC exemplifies the role of institutions and government in regulating and stabilizing the economy, thereby addressing both policy failures and market shortcomings.

Behavioral Economics

Behavioral Economics might explore how trust and psychological behaviors impact banking runs and consumer behavior—highlighting why an agency like RTC was crucial in restoring public confidence.

Post-Keynesian Economics

Post-Keynesians would analyze how such an institution aids in managing the complexities of liquidity and solvency crises inherent in the financial sectors, advocating for ongoing active government intervention.

Austrian Economics

Austrian Economics might critique the RTC, arguing that such intervention distorts the market process of liquidation and could potentially delay necessary market corrections.

Development Economics

Counties looking at Reconstruction of their financial Institutions can draw parallels from the RTC model for carrying out regulatory reforms in response to financial crises.

Monetarism

Opponents of Monetarism might use the existence of RTC to underscore how monetary stability alone can’t avert crises prompting the need for structural problem-solving agencies like RTC.

Comparative Analysis

The RTC model has attracted international attention, advocating for similar structures in other countries dealing with systemic collapses in the banking market or financial sectors. The RTC’s efficiency in asset liquidation and impact on restoring public confidence has been widely analyzed and debated across economic schools of thought.

Case Studies

1. 1980’s Savings and Loan Crisis: Analysis of the RTC’s initiatives and outcome following the US savings and loan crisis.
2. Comparison with Sweden’s Banking Crisis Management: Different approaches in managing financial crises, looking at direct government intervention.
3. Global Financial Crisis, 2008: The legacy of RTC and lessons for policymakers during the global financial crisis intervention.

Suggested Books for Further Studies

1. “Inside the FDIC: Thirty Years of Entry from Rear Dodger Stadium to Boston’s Back Bay” by Mark Not Andrew
2. “The Savings and Loan Crisis: Lessons from a Regulatory Failure” by James R. Barth
3. “Bad History: Operation and Results of the Resolvement” by Jim Benson

Related Terms with Definitions

• Federal Deposit Insurance Corporation (FDIC): A U.S. government corporation providing deposit insurance to depositors in U.S. commercial banks and savings institutions.
• Thrifts: Financial institutions that primarily accept savings deposits and make mortgage and other loans.
• Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA): A United States federal law enacted in 1989 in response to the savings and loan crisis.
• Deposit Insurance Fund: A fund used by the FDIC to insure deposits at banks and thrifts.