Reflections on Three Financial Crises
On January 14, 2025, I had the privilege of attending FDIC Chairman Martin Gruenberg's speech at the Brookings Institution. He shared his insights on three financial crises he's witnessed throughout his career: the savings and loan (S&L) crisis of the 1980s and early 1990s, the 2008 global financial crisis, and the recent regional bank failures in the spring of 2023. As I listened, I was struck by how his observations resonated with the work we do at Polygon Research, where we leverage the power of open data to understand and navigate the complexities of the financial landscape, and specifically mortgage lending.
Gruenberg emphasized the common threads that weave through these seemingly disparate crises: interest rate and liquidity risks, concentrated assets and deposits, excessive leverage, rapid growth, inadequate capital, poorly understood new financial products and activities, interconnectedness with non-bank financial companies, poor bank management, and failures of supervision and regulation. These factors, he argued, have repeatedly contributed to systemic instability and financial distress.
Gruenberg's perspective, of course, is that of the regulator, typically top down. Our perspective at Polygon Research is bottom up. As we look at the microdata, loan-level data, and reason with comprehensive data sets, we learn more about decisions and exposure to risk, and we learn how to mitigate those risks. At Polygon Research, we believe that data holds the key to understanding these risks and mitigating their impact. We tap into the wealth of information available in open data sources like the Home Mortgage Disclosure Act (HMDA) data and agency loan-level data to create a granular view of the financial system and identify potential vulnerabilities before they escalate into full-blown crises. Moreover, we can map and analyze the relationships between different financial institutions and markets using this data, providing a systemic view of risk that can be invaluable in understanding and mitigating potential crises.
Let's delve into some specific examples of how Polygon Research's data analysis capabilities can shed light on the issues raised by Chairman Gruenberg.
The Savings and Loan Crisis
The savings and loan crisis of the 1980s and early 1990s, as described by Gruenberg, offers a stark reminder of the dangers of unchecked deregulation and inadequate oversight. He explained how the deregulation of savings and loan associations, coupled with ineffective supervision by the Federal Home Loan Bank Board, allowed these institutions to engage in risky lending practices and ultimately led to widespread failures.
Gruenberg highlighted how the crisis was exacerbated by the rise of "shadow banking," or nonbank financial institutions, which operated outside the traditional regulatory framework. These institutions were not subject to the same capital requirements and supervisory scrutiny as banks, allowing them to take on greater risks and contribute to the overall instability of the financial system.
Polygon Research can analyze historical data to identify patterns of regulatory failures and the emergence of shadow banking activities. By examining trends in lending practices, investment strategies, and regulatory actions, we can provide valuable insights into the factors that contribute to systemic risk.
The 2008 Global Financial Crisis, Mortgage Market Excesses and the Perils of Interconnectedness
Gruenberg's reflections on the 2008 global financial crisis underscored the dangers of excessive risk-taking in the mortgage market and the interconnectedness of the financial system. He pointed to the deterioration of lending standards, the proliferation of complex mortgage-backed securities, and the inadequate capital levels of many financial institutions as key contributors to the crisis.
Gruenberg also highlighted the role of deregulation in the lead-up to the 2008 crisis, noting that opposition to limiting bank activities and growth contributed to the buildup of risk. This deregulation, combined with a belief that financial institutions would self-regulate, created an environment where excessive risk-taking could flourish.
The crisis was further fueled by specific mortgage market developments that weakened credit standards, such as the originate-to-distribute model. This model incentivized lenders to originate mortgages without regard for their long-term viability, as they could quickly sell these loans to investors through securitization. This practice led to a decline in underwriting standards and a surge in risky lending.
Polygon Research can analyze Home Mortgage Disclosure Act (HMDA) data and agency loan-level data to track these trends and provide a comprehensive picture of the mortgage market leading up to the crisis. For instance, we can generate charts illustrating the surge in mortgage originations between 2000 and 2005-06, followed by the sharp decline during the crisis. As we can see, the growth in originations was led by a surge in conventional loans (i.e. non-government loans), which represented 92-96% of the entire market.
This chart clearly demonstrates the rapid expansion and subsequent contraction of the mortgage market, a key factor in the financial turmoil.
Furthermore, we analyze the geographic distribution of these loans, pinpointing areas with high concentrations of subprime lending. This granular level of detail can help identify regions that were particularly vulnerable to the housing market downturn.
Loan Product Trends and Risk
Gruenberg also discussed the rise and fall of risky loan products like adjustable-rate mortgages (ARMs) and interest-only loans. Polygon Research can track the prevalence of many of these products over time using both HMDA LAR and agency loan-level data.
For example, we can create visualizations showing the proportion of interest-only loans originated each year in HMDAVision from 2018 forward. The notable trend is that beginning in 2022, Interest-only loans increased as percent of overall originations in the segment of 1-4 units (not for business purpose), increasing to more than 12% in 2023, up from
This analysis helps us spot trends and understand how changes in loan product trends contribute to overall financial risk. Drilling deeper and asking another question, "what is the relevant prevalence of this product in different lender types", we can spot a concentration with depository institutions.
Additional metrics that describe risk and exposure include debt-to-income ratios, loan-to-value ratios, and credit scores of borrowers who have taken out these loans.
Borrower Characteristics and Access to Credit
Gruenberg touched upon the importance of ensuring fair and equitable access to credit. Polygon Research allows user of HMDAVision to leverage HMDA data to analyze the distribution of mortgage loans by borrower characteristics such as race, ethnicity, etc. This analysis can reveal disparities in lending practices and identify potential areas of discrimination.
By examining loan approval rates and loan terms across different demographic groups, users of HMDAVision gain valuable insights into the fairness and inclusivity of the mortgage market. This information can be used to promote responsible lending practices and address systemic inequalities.
Data-Driven Insights for a More Stable Financial System
The insights shared by Chairman Gruenberg underscore the critical need for robust data analysis in understanding and managing financial risk. His reflections on three distinct financial crises highlight recurring themes of excessive risk-taking, regulatory failures, and the interconnectedness of the financial system. These themes resonate deeply with the work we do at Polygon Research.
By harnessing the power of open data, such as HMDA data and agency loan-level data, Polygon Research provides clients with the tools and knowledge they need to navigate the complexities of the financial system. Our expertise in analyzing this data allows us to identify emerging trends, assess risk, and promote financial stability. We can help clients understand the factors that contribute to financial crises, identify potential vulnerabilities in their own operations, and take proactive steps to mitigate risk.
We encourage you to explore our website and learn more about how Polygon Research can help you make informed decisions in today's dynamic financial environment. Contact us today to discuss your specific needs and discover how our data-driven solutions can benefit your organization.
