Determined to avoid a repeat of this debacle, the government tightened banking regulations with the Glass-Steagall Act of 1933. It prohibited commercial banks, which serve consumers and small and medium-size businesses, from engaging in investment banking and created the Federal Deposit Insurance Corporation, which insured deposits up to a certain threshold. That limit has risen sharply over the past 90 years, from $2,500 in 1933 to $250,000 in 2010 – the same limit in place today.

The nation’s new and improved banking regulations ushered in a period of relative stability in the banking system that lasted about 50 years.

But in the 1980s, hundreds of the small banks known as savings and loan associations failed. Savings and loans, also called “thrifts,” were generally small local banks that mainly made mortgage loans to households and collected deposits from their local communities.

Beginning in 1979, the Federal Reserve began to hike interest rates very aggressively to fight the high inflation rates that had become entrenched.

By the early 1980s, Congress began allowing banks to pay market interest rates on depositers’ accounts. As a result, the interest rate S&Ls had to pay their customers was much higher than the interest income they were earning on the loans they had made in prior years. That imbalance caused many of them to lose money.

Even though about 1 in 3 S&Ls failed from around 1986 through 1992 – somewhere around 750 banks – most depositors at small S&Ls were protected by the FDIC’s then-$100,000 insurance limit. Ultimately, resolving that crisis cost taxpayers the equivalent of about $250 billion in today’s dollars.

Because the savings and loans industry was not directly connected to the big banks of that era, their collapse did not cause runs at the bigger institutions. Nevertheless, the S&L collapse and the government’s regulatory response did reduce the supply of credit to the economy.

As a result, the U.S. economy underwent a mild recession in the latter half of 1990 and first quarter of 1991. But the banking system escaped further distress for nearly two decades.

Against this backdrop of relative stability, Congress repealed most of Glass-Steagall in 1999 – eliminating Depression-era regulations that restricted the scope of businesses that banks could engage in.

Those changes contributed to what happened when, at the start of a recession that began in December 2007, the entire financial sector suffered a panic.

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