Determinants of thrift institution resolution costs

Article Abstract:

This paper provides a detailed examination of the cost imposed by thrift institutions resolved during the period 1980-1988. A simple model is presented to explain the cost of resolution. This model is tested empirically with a comprehensive data set that permits us to avoid some of the econometric problems present in earlier studies. The empirical evidence suggests that the model that explains resolution costs in the late 1980s is significantly different from the model for either the middle or early 1980s. This evidence is consistent with the changing nature of the thrift crisis and changes in the regulator's closure rule. Our econometric evidence, moreover, is consistent with the hypotheses that, for troubled institutions, tangible net worth systematically understates market-value net worth. In addition, the importance of including time effects as well as institution effects as determinants of the cost of resolution is revealed. (Reprinted by permission of the publisher.)

Standards, Analysis, Management, Accounting, United States. Federal Savings and Loan Insurance Corp.

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Regulatory incentives and the thrift crisis: dividends, mutual-to-stock conversions, and financial distress

Article Abstract:

During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual-to-stock conversions. We test a theory of how regulators encouraged capital-impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress. (Reprinted by permission of the publisher.)

Dividends, Incentives (Business)

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Hedging and coordinated risk management: evidence from thrift conversions

Article Abstract:

We provide an explanation for hedging as a means for allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest-rate risk and increasing credit risk. We provide some evidence that risk-management activities are related to growth capacity and management compensation structure attained at conversion. (Reprinted by permission of the publisher.)

Risk management, Hedging (Finance)

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