How did the increase in the interest rates in the early 1980

How did the increase in the interest rates in the early 1980s contribute to the S&L crisis?

Solution

The savings & loan crisis of 1980s was the failure of half of the savings and loan associations in the USA from 1986 to 1995. In early 1980s the central bank of the USA increased the discount rate (the interest rate it charges member banks for borrowing from Fed) from 9.5? to 12? to prevent inflation. This increased the cost of borrowing for S&L institutions. The loans they\'ve issued at a fixed interest rate became costlier to them because the fixed interest rate was lower than the interest rate at which they could borrow from Central Bank. When interest rate at which they could borrow increased, the S & L associations couldn\'t attract adequate capital and they became insolvent. However, inspite of their insolvency, some S&L invested in highly speculative investment strategies which had affected those associations adversely by extending their period of insolvency and economic loses.