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17 0 0 G S tre e t, N .W .
W a s h in g to n , D .C . 2 0 5 5 2
F ed eral H o m e Loan Bank S y s te m

Federal Home Loan Bank Board

F ed e ra l H o m e Loan M o rtg a g e C o rp o ra tio n
F ed e ra l S a v in g s and Loan In surance C o rp o ra tio n

O FFICE OF P O L IC Y A N D E C O N O M IC R E S E A R C H

M O R A L H A Z A R D A N D T H E T H R I F T CRISIS:
\N A N A L Y S I S OF 1 9 8 8 R E S O L U T I O N S

h r'

./JU *

R e s e a r c h Paper #160
by
J a m e s R. B a r t h
P h i l i p F. B a r t h o l o m e w
C a r o l J. L a b i c h

O f f i c e of P o l i c y a n d E c o n o m i c R e s e a r c h
Federal Home Loan Bank Board
M a y 1989

t 0
I?

i */
Manuscripts
by
staff
of
t h e O f f i c e of P o l i c y a n d E c o n o m i c
Research
and
by
others
associated
with
the
Office
a re
p r e s e n t e d for y o u r r e v i e w a n d d i s c u s s i o n .
V i e w s e x p r e s s e d in
the p a p e r s d o n o t n e c e s s a r i l y r e p r e s e n t p o l i c y of the F e d e r a l
Home
L o a n B a n k B o a r d or of the O f f i c e of P o l i c y a n d E c o n o m i c
Research.
Your
comments
to
t h e a u t h o r s w i l l h e l p in the
f u r t h e r d e v e l o p m e n t of the s u b j e c t s a n d w i l l a s s i s t in p o l i c y
formulation.
The
Federal
Home
Loan
Bank
Board
d o e s n o t c o p y r i g h t the
Research Papers.
Y o u m a y r e p r o d u c e c o p i e s of them.




Moral Hazard and the Thrift Crisis:
An Analysis of 1988 Resolutions

by
James R. Barth
Philip F. Bartholomew
Carol J. Labich*

25th Annual Conference on Bank Structure and Competition
Federal Reserve Bank of Chicago
May 3-5, 1989

F o r t h c o m i n g in t h e C o n s u m e r
Finance Lav Q u a r t e rly Rspnr^

*

James R. Barth is Chief Economist and Director of the Office
of Policy and Economic Research, Federal Home Loan Bank
Board; Philip F. Bartholomew is a Financial Economist in the
Office of Policy and Economic Research; Carol J. Labich is a
Research Analyst in the Office of Policy and Economic
Research.
The authors gratefully acknowledge helpful
comments and assistance provided by Michael G. Bradley,
David Bragg, Donald Edwards, Eric Hirschhorn, Everson Hull,
Lance Jones, Robert Pomeranz, Romelle Roeske, and David
Whidbee.
Ruby Joyner, Sharon McLeod, and Carolyn Thomas
deserve thanks for their prompt and careful preparation of
the manuscript.
The views expressed do not necessarily
reflect those of the Federal Home Loan Bank Board.




INTRODUCTION

N o t s i n c e the G r e a t D e p r e s s i o n h a s th e t h r i f t i n d u s t r y
e x p e r i e n c e d s u c h t u r m o i l a n d u n c e r t a i n t y as in r e c e n t y e a r s .
The Federal Savings and Loan Insurance C o r p o r a t i o n

(F SL IC )

a c t i o n a g a i n s t m o r e t h a n 800 t r o u b l e d t h r i f t i n s t i t u t i o n s
1980

took
from

t h r o u g h 1 9 8 8 at an e s t i m a t e d p r e s e n t - v a l u e c o s t of n e a r l y

$50 b i l l i o n .

In a d d i t i o n ,

a n o t h e r 578 i n s t i t u t i o n s w e r e

i d e n t i f i e d in M a r c h 1 9 8 9 as r e q u i r i n g f u t u r e a c t i o n at a c o s t
j us t u n d e r $ 40 b i l l i o n .

T h e t h r i f t c r i s i s of the 1 9 8 0 s w a s

t h e r e f o r e e s t i m a t e d b y the F e d e r a l H o m e L o a n B a n k B o a r d
Board)

to c o s t

r o u g h l y $90 b i l l i o n .

e v e n t u a l l y p r o v e s to be too low,

( B ank

E v e n if t h i s e s t i m a t e

the c o s t s a l r e a d y e x c e e d t h o s e

e x p e r i e n c e d b y t h r i f t s d u r i n g the 1 9 3 0 s .
A s a r e s u l t of the e n o r m o u s c o s t of r e s o l v i n g the t h r i f t
crisis,

it w i l l be b o r n e b y n o t o n l y h e a l t h y t h r i f t s ,

taxpayers.

but also

H o n o r i n g the f e d e r a l g o v e r n m e n t ' s g u a r a n t e e

to m a k e

w h o l e al l i n s u r e d d e p o s i t s h a s p r o v e n to be m o r e c o s t l y a n d to
r e q u i r e a m o r e b r o a d l y b a s e d s o u r c e of f u n d s t h a n a n t i c i p a t e d
w h e n th e F S L I C w a s e s t a b l i s h e d in 1934.

The Congress

is

r e a c t i n g to t h i s s i t u a t i o n b y p a s s i n g l e g i s l a t i o n s p e c i f y i n g w h o
w i l l b e a r th e c o s t a n d r e q u i r i n g r e g u l a t o r y a n d s t r u c t u r a l
r e f o r m s to p r e v e n t a s i m i l a r s i t u a t i o n f r o m e v e r a g a i n
occurring.




2

T h e p u r p o s e of t h i s p a p e r

is t h r e e f o l d .

First,

the n a t u r e

a n d m a g n i t u d e of t he t h r i f t c r i s i s w i l l be d o c u m e n t e d .

Only

w i t h a p p r o p r i a t e data can one c o m p r e h e n d e x a c t l y wha t happened,
where

it h a p p e n e d ,

a n d w h e n it h a p p e n e d .

Second,

th e c r i s i s w i l l be i d e n t i f i e d a n d d i s c u s s e d .

the c a u s e s of

Only through such

an e x e r c i s e c a n o n e p r o p e r l y a s s e s s a n y l e g i s l a t i v e
be s u r e a s i m i l a r p r o b l e m w i l l n o t o c c u r a g a i n .
important,

changes

Third,

to

and most

a n a t t e m p t w i l l be m a d e to i d e n t i f y the w a y t h a t

f e d e r a l d e p o s i t i n s u r a n c e i t s e l f c o n t r i b u t e d to th e c r i s i s .
A l t h o u g h m a n y s t u d i e s h a v e a n a l y z e d the " m o r a l h a z a r d "
arising from deposit insurance
( 19 67 ),
Sharpe
Chen,

Scott and Mayer
(1 9 78 ),

and Kane

and H e rring
knowledge,

Merton
( 19 8 1 ) ,

(1 9 8 2 ) ,

[see,

( 1971),

( 1 97 8) ,

( 19 83 ) ,

Meltzer

Kareken and Wallace

Dothan and Williams

McCulloch

Pyle

for e x a m p l e ,

(1 981),

Kane

and Kareken

n o n e h a s a s s e s s e d its e m p i r i c a l

problem

( 1 9 78 ) ,

( 19 8 0 ) ,

( 1981),
(1983)],

Buser,

Guttentag
to o u r

importance.

T h i s is

d o n e h e r e b y u s i n g t i m e - s e r i e s d a t a for a l l 205 t h r i f t
institutions

r e s o l v e d in 1 9 8 8 to e x a m i n e th e c h a n g i n g

" r i s k i n e s s " o f t h r i f t p o r t f o l i o s as c a p i t a l d e t e r i o r a t e s .

THE 1980s IN P E R S P E C T I V E
The thrift industry has undergone
recent years.

tremendous change

T o u n d e r s t a n d th e r e a s o n for al l of the a t t e n t i o n

and c o n t r o v e r s y that s u rr ounds this industry,

we have documented

s o m e of th e m o r e i m p o r t a n t c h a n g e s t h a t h a v e o c c u r r e d .




in

3

An Overview of the Thrift Industry
In T a b l e 1 a n d C h a r t s 1 a n d 2, w e p r e s e n t i n f o r m a t i o n a b o u t
t he t h r i f t i n d u s t r y f r o m 1 9 8 0 t h r o u g h 1988.
information,

Bas e d u p o n this

o n e c a n d i s c e r n the f o l l o w i n g f ac t s .

First,

i n d u s t r y h a s b e e n u n d e r g o i n g c o n s o l i d a t i o n s i n c e 1980.
year,

there were n early 4,000 thrifts, whe r e a s

In th at

the n u m b e r

d e c l i n e d to j u s t u n d e r 3 , 0 0 0 b y the e n d of 1 988.
however,

the

Total assets,

i n c r e a s e d to $ 1. 4 t r i l l i o n f r o m $ 6 0 4 b i l l i o n o v e r the

same period.

Second,

dominated by stock

the i n d u s t r y h a s i n c r e a s i n g l y b e c o m e

rather than mutual

b e g i n n i n g of the d e c a d e ,

institutions.

o n l y 20 p e r c e n t of a ll t h r i f t s w e r e

s t o c k w i t h 27 p e r c e n t of t o t a l i n d u s t r y a s s e t s .
y e a r - e n d 1 9 88 ,

A t the

However,

by

s u c h t h r i f t s a c c o u n t e d for 44 p e r c e n t of a ll

t h r i f t s w i t h 74 p e r c e n t of all a s s e t s .

Third,

e v e n t h o u g h the

p e r c e n t a g e of f e d e r a l l y c h a r t e r e d t h r i f t s i n c r e a s e d o n l y 8
p e r c e n t a g e p o i n t s to 58 p e r c e n t f r o m 1 9 8 0 to 1988,
assets controlled by these institutions
56 p e r c e n t .

Fourth,

the s h a r e of

r o s e to 71 p e r c e n t f r o m

thrifts have diversified into new

a c t i v i t i e s d u r i n g this period.

T h e s h a r e o f a s s e t s d e v o t e d to

h o m e m o r t g a g e s d e c l i n e d to 39 p e r c e n t in 1 9 8 8 f r o m 67 p e r c e n t in
1 9 80 .

A t t he s a m e time,

the g r o w i n g i m p o r t a n c e of

s e c u r i t i z a t i o n is e v i d e n t .

Whereas thrifts held only 4 percent

o f t h e i r a s s e t s in m o r t g a g e - b a c k e d s e c u r i t i e s
i n c r e a s e d to 15 p e r c e n t b y 1988.
r e c o r d $ 12 b i l l i o n in 1988.
nonoperating factors




(i.e.,

F if t h ,

in 1980,

the s h a r e

the i n d u s t r y l o s t a

A l l of t h i s l o s s w a s d u e to
a s s e t w r i t e - d o w n s a n d a d d i t i o n s to




Table 1
U.S. Thrift Industry:

1980- 1988

1980
Number of Institutions
Total Assets ($ Billions)
GAAP Net Worth (Millions)
Tangible Net Worth ($ Billions)
Net Income ($ Millions)
Net Operating Income ($ Millions)
Net Nonoperating Income ($ Millions)
Taxes ($ Millions)
Percent
Percent
Total
Percent

of Home Mortgages to Total Assets
of Mortgage Backed Securities to
Assets
of Mortgage Assets to Total Assets

Stock Institutions
(X of Number of Institutions)
(X * / Total Assets)
Federally-Chartered
(X or Number of Institutions)
(X of Total Assets)

1981

1982

1983

1984

1985

1986

1987

1988

3,993
604
32
32

3,751
640
27
25

3,287
686
20
4

3,144
814
25
4

3,134
978
27
3

3,244
1,070
34
9

3,220
1,164
39
15

3,147
1,251
34
9

2,949
1,352
46
23

(4,631)
(7,114)
964
(1,519)

(4,142)
(8,761)
3,041
(1,578)

1,945
(46)
2,567
576

1,022
990
796
764

3,728
3,601
2,215
2,087

131
4,562
(1,290)
3,141

66.5

" 4578

56.3

49.4

44.#

42.4

38.#

it.6

38.6

4.4
70.8

5.0
70.1

8.6
64.9

10.9
60.7

11.1
56.0

10.4
52.8

13.1
52.0

15.6
53.4

15.4
53.9

20.0
27.0

21.0
29.0

23.0
30.0

24.0
40.0

30.0
52.0

33.0
56.0

37.0
62.0

40.0
70.0

44.0
74.0

50.0
56.0

51.0
63.0

51.0
70.0

51.0
66.0

54.0
64.0

53.0
64.0

54.0
64.0

56.0
65.0

58.0
71.0

43
0.4
0

87
14
(0.35)

237
64
(5)

293
79
(6)

445
110
(6)

470
131
(9)

471
126
(13)

520
183
(24)

364
114
(16)

287
38
1

690
146
3

929
241
(3)

933
263
(3)

911
380
(3)

719
293
(1)

544
367
(1)

434
230
(1)

392
316
1

781
790
398
407

(7,779) (12,057)
2,850
907
(7,930) (11,012)
2,699
1,952

GAAP Capital-to-Asset Ratio
< OX
Number
Tt al Assets ($ Billions)
Tangible Net Worth ($ Billions)
OX to 3X
Number
Total Assets ($ Billions)
Tangible Net Worth ($ Billions)
3X to 6X
Number
Total Assets ($ Billions)
Tangible Net Worth ($ Billions)
> 6%
Number
Total Assets ($ Billions)
Tangible Net Worth ($ Billions)

1,959
383
18

1,801
379
15

1,315
319
6

1,222
382
7

1,092
399
7

1,173
507
9

1,150
541
12

1,002
537
14

968
639
18

1,704
182
14

1,173
101
8

806
62
5

698
90
5

688
88
6

884
139
9

1,055
229
17

1,191
300
20

1,225
282
20

Resolutions
Number
Total Assets ($ Billions)
Estimated Present-Value Cost ($ Millions)

11
1,458
167

28
13,908
759

63
17,662
803

36
4,631
275

22
5,080
743

30
5,601
979

46
12,455
3,065

47
10,660
3,704

205
100,660
31,180

Note: Resolutions do not include 18 “
stabilizations1 in 1988 that had assets of $7,463 million and tangible net worth of
1
negative $3,348 million, and an estimated present value resolution cost of $6,838 million.

5

Chart 1

GAAP—
Solvent & GAAP—
Insolvent Thrifts
(1980 - 1988)

N u m b e r of Institutions
GAAP-Insolvent
■Thrifts

4,000

W M GAAP-Solvent
illM Thrifts

3,000

2,000

1,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

Chart 2

Assets of GAAP-Solvent & GAAP-Insolvent Thrifts
(1980 - 1988)

Assets ($ Billions)




GAAP-Insolvent
Thrifts
GAAP-Solvent
Thrifts

1980

1981

1982

1983

1984

1985

1986

1987

1988

6

loan loss
1981

reserves)

and taxes.

In c o n t r a s t ,

th e h u g e l o s s e s in

a n d 1 9 8 2 w e r e e n t i r e l y d u e to o p e r a t i n g f a c t o r s

negative

i n t e r e s t rate spread).

GAAP-insolvent thrifts
the d e c l i n e ,

S i xt h ,

a

th e n u m b e r of

increased each year until

there were still

(i.e.,

1988.

Despite

364 i n s o l v e n t i n s t i t u t i o n s

o p e r a t i n g w i t h $ 1 1 4 b i l l i o n in a s s e t s at y e a r - e n d .

Th e

e x i s t e n c e of t h e s e i n s t i t u t i o n s as w e l l as h u n d r e d s of o t h e r s
that were

"marginally"

solvent explains why more

d o n e to r e s o l v e t h e t h r i f t c r i s i s .

Finally,

well-capitalized thrift institutions
capital-to-asset

the n u m b e r of

(i.e.,

those with GAAP

ratios exceeding 6 percent)

i n c r e a s i n g s i n c e 1 984.

r e m a i n s to be

A t y e a r - e n d 1988,

has actua l l y been

there were 1,225 such

t h r i f t s w i t h $ 2 8 2 b i l l i o n in a s s e t s a n d $ 20 b i l l i o n in t a n g i b l e
capital.

Thrift Failures and Resolutions
It h a s b e e n w i d e l y r e p o r t e d t h a t h u n d r e d s of t h r i f t
i n s t i t u t i o n s h a v e f a i l e d a n d h a v e b e e n r e s o l v e d b y the F S L I C in
recent years.

It is n o t a l w a y s c l e a r ,

"failure" and "resolution" mean.

however,

w h a t the t e r m s

A r e a s o n a b l e d e f i n i t i o n of

f a i l u r e is w h e n t h e m a r k e t v a l u e of a t h r i f t is n o l o n g e r
positive.

M e a s u r i n g the m a r k e t v a l u e of a t h r i f t is t y p i c a l l y a

d i f f i c u l t a n d c o n t r o v e r s i a l task,

however.

D e s p i t e th e l a c k of i n f o r m a t i o n a v a i l a b l e to a c c u r a t e l y
d e t e r m i n e t he m a r k e t v a l u e of i n d i v i d u a l t h r i f t i n s t i t u t i o n s ,
i n f o r m a t i o n r e g a r d i n g b o o k v a l u e s is r e a d i l y a v a i l a b l e .
knows,




for e x a m p l e ,

the n u m b e r of t h r i f t s t h a t a r e G A A P

One

7

insolvent.

O n e a l s o k n o w s w h e n the F S L I C h a s t a k e n an a c t i o n

a g a i n s t a n i n s t i t u t i o n a n d w h e t h e r the a c t i o n r e q u i r e d an
e x p e n d i t u r e of f u n ds .

A n a p p r o x i m a t i o n to the n u m b e r of

f a i l u r e s is t h e r e f o r e the i n s t i t u t i o n s a g a i n s t w h i c h the F S L I C
has a l r e a d y taken act i on plus open but G A A P - i n s o l v e n t
institutions.

Table 1 and Charts 3 and 4 contain such

information.
D u r i n g the 1 9 8 0s ,

the F S L I C h a s t a k e n f iv e d i f f e r e n t t y p e s

of a c t i o n s a g a i n s t t r o u b l e d t h r i f t i n s t i t u t i o n s :
liquidation,

(2) a s s i s t e d m e r g e r ,

management consignment program
merger.

Actions

(5)

the F S L IC .

(3) s t a b i l i z a t i o n ,

(MCP),

and

(4)

(5) s u p e r v i s o r y

(1) a n d (2) ar e m e a n t to be f i n a l a n d i m p o s e

c o s t s u p o n the F S L I C .
Action

(1)

T h e s e are r e f e r r e d to as r e s o l u t i o n s .

is a l s o m e a n t to be f i n a l b u t i m p o s e s no c o s t u p o n
Actions

(3) a n d

(4) a re t e m p o r a r y a c t i o n s t h a t w i l l

e v e n t u a l l y l e a d to l i q u i d a t i o n s or m e r g e r s .
F r o m 1 9 8 0 t h r o u g h 1988,
institutions,

the F S L I C l i q u i d a t e d 77

e n g a g e d in 411 a s s i s t e d m e r g e r s ,

stabilizations,

a n d 333 s u p e r v i s o r y m e r g e r s .

p r e s e n t - v a l u e c o s t of the l i q u i d a t i o n s ,
stabilizations

is n e a r l y $5 0 b i l l i o n .

$ 1 8 0 b i l l i o n in a s s e t s .

In 19 8 8 a l o n e ,

77 M CP s,

18

The e s t i m a t e d

assisted mergers,

and

These institutions held
223 t h r i f t s w e r e

r e s o l v e d or s t a b i l i z e d at a n e s t i m a t e d c o s t of $ 38 b i l l i o n .
A l t h o u g h the F S L I C t o o k a c t i o n a g a i n s t a g r e a t e r n u m b e r of
t r o u b l e d t h r i f t s in 1982, m o s t w e r e s u p e r v i s o r y m e r g e r s a n d the
cost was only $803 million.




8

Chart 3

Thrift Failures
(1980 - 1988)
N u m b e r of Institutions
700

GAAP—
Insolvent

59761

600
484

500
400

48

53 o55

MCPs (Management Consignment
Program) & Stabilizations
Supervisory Mergers
(No Cost)
Liquidations &
Assisted Mergers

$11

363
111

300
200

Ilf!

100
0

Chart 4

Actions Taken by the FSLIC
(1980 - 1988)
N u m b e r of Institutions
300

Supervisory Merg ers
| Stabilizations

250 -

[^Assisted Mergers

200




B Liquidations

v# ° ^

^

^

^

9

M a i n l y as a r e s u l t of all the a c t i o n s t a k e n in 1988,

the

n u m b e r of G A A P - i n s o l v e n t i n s t i t u t i o n s d e c l i n e d to 364 f r o m 520
in the p r e v i o u s y e a r .
assets.

These

i n s t i t u t i o n s h e l d $ 1 1 4 b i l l i o n in

Addi n g together GAAP insolvent and other nearly

insolvent institutions,

the B a n k B o a r d on M a r c h 1, 1 9 8 9

i d e n t i f i e d 578 t h r i f t s t h a t w o u l d l i k e l y r e q u i r e
at a n e s t i m a t e d c o s t of $38 b i l l i o n
prompt action,

however,

[see W a l l

future action

(1989)].

Without

t h i s c o s t w a s e x p e c t e d to be p u s h e d

still higher.

Regional Distribution of Thrift Resolution Costs
T a b l e 2 s h o w s t h a t the d i s t r i b u t i o n of t h r i f t
costs,

b o t h a c r o s s the c o u n t r y a n d o v e r time,

resolution

has b e e n quite

uneven.

The cost figures include on l y l i q u i d a t i o n s and ass i s te d

mergers,

o m i t t i n g the $7 b i l l i o n c o s t of the 18 s t a b i l i z a t i o n s

in 1 988.

Clearly,

T e x a s h a s a c c o u n t e d b y far for the l a r g e s t

s h a r e — a b o u t h a l f — of the t o t a l c o s t of al l
1 98 0 t h r o u g h 1988.

California,

Florida,

resolutions from

and Illinois account

f or a b o u t a n o t h e r o n e - f o u r t h of the t o t a l cost.

This

i n f o r m a t i o n h a s l e d s o m e to a r g u e t h a t t he t a x b u r d e n of
r e s o l v i n g the t h r i f t c r i s i s s h o u l d r e f l e c t th e r e g i o n a l
d i s t r i b u t i o n o f th e r e s o l u t i o n cost.
T h e e x t e n t to w h i c h the h u g e c o s t s i n c u r r e d in 19 8 8 are
e m b e d d e d losses from actions taken by thrifts y e a r s earlier will
be d i s c u s s e d b e l o w .




T h i s d i s c u s s i o n w i l l d e m o n s t r a t e t h a t one

Table 2
Estimated Resolution Cost of FSLIC-Resolutions by State
($ Millions)
1980

1981

1982

1983

1984

1985

Alaska
Alabama
Arkansas
California
Colorado
District of Columbia
Florida
Georgia
Hawaii
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
North Dakota
Nebraska
New Jersey
New Mexico
Nevada
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
West Virginia
Wyoming

0
0
0
0
0
0
15
0
1
3
0
17
0
0
0
0
0
0
11
0
0
0
0
0
0
0
10
2
0
0
104
0
0
0
0
3
0
0
0
0
0
0
0
0
0
0

3
0
0
0
0
3
33
0
0
0
0
76
0
0
0
0
0
24
0
95
51
0
0
5
13
0
9
0
0
361
0
0
0
0
84
0
0
0
0
1
0
0
0
0
0
0

0
0
0
3
0
0
16
2
0
0
0
354
0
3
8
3
51
10
0
0
1
1
5
0
4
0
21
2
0
211
0
0
0
11
7
0
0
0
0
78
0
14
0
0
0
0

0
3
0
0
0
0
0
0
0
9
0
32
38
0
0
21
0
0
16
1
77
0
0
0
0
0
0
6
0
13
27
0
0
13
0
0
0
4
0
0
0
12
0
3
0
0

0
0
0
330
0
0
0
0
0

0
0
80
164
0
1
0
0
0
0

0
0
82
8
22
62
15
0
3
10
0
3
0
8
16
65
0
0
0
0
0
3
5
0
0
0
0
5
0
0
2
0
146
0
0
0
0
0
17
155
163
18
174
0
0
'
0

Year Total

167

759

803

275

743

979

State




0

0
37

0
0
0

4

0

21

0

0
0

8

0
0
39
0
16
0
0
4
28
0
0
0
1
10

1986
4
0
657
159
36
0
701
0
0
0
0
16
0
7
93
418
0
0
13
0
75
0
0
0
0
0
0
2
0
59
222
71
21
0
0
0
0
0
0
493
0
0
(13)
0
0
30
3,065

1987

1988

State Toi

2
0
90
715
0
0
0
0
0
102
121
173
0
20
0
539
0
69
14
0
100
0
0
0
0
5
55
0
0
0
22
41
27
0
0
0
0
0
0
1,504
46
35
22
0
0
0

0
13
28
5,439
515
0
1,315
5
0
327
2
1,379
152
20
84
177
0
0
175
205
0
0
11
34
0
0
233
84
0
0
478
744
362
0
0
0
0
8
34
18,614
0
136
92
0
81
147

9
16
858
6,654
573
65
2,095
7
4
451
123
2,087
190
58
201
1,226
51
125
229
301
303
12
21
39
56
5
345
100
0
648
884
857
556
23
92
13
0
12
131
21,010
209
215
274
3
81
177

3,704

30,894

41,388

11

cannot c o n c lu d e that beca u s e
w e r e i n c u r r e d in 1988,

r o u g h l y 80 p e r c e n t of the c o s t s

the t h r i f t p r o b l e m is a v e r y r e c e n t

problem.

Comparison of Thrift Failures of the 1930s and 1980s
It is u s e f u l to c o m p a r e the t h r i f t c r i s i s of the 1 9 8 0 s w i t h
the p r o b l e m s e x p e r i e n c e d b y t h r i f t s d u r i n g the G r e a t D e p r e s s i o n .
C h a r t s 5 a n d 6 d o t h i s b y c o m p a r i n g the rate of t h r i f t f a i l u r e s
for the t w o p e r i o d s as w e l l as the c o s t s a s s o c i a t e d w i t h the
failures.

A s C h a r t 5 show s,

the f a i l u r e

ra t e for t h r i f t s in

r e c e n t y e a r s h a s e x c e e d e d t h a t for t h r i f t s d u r i n g the 1 93 0s .
Chart 6 shows that FSLIC's losses
assets
1 9 3 0s .

r e l a t i v e to t o t a l

industry

in 1 9 8 8 w e r e far g r e a t e r t h a n in a n y y e a r d u r i n g the
T h e c r i s i s in the 1 9 8 0 s ,

generated

in o t h e r w o r d s ,

has a l re a d y

relatively greater failures and failure costs with

f e d e r a l d e p o s i t i n s u r a n c e t h a n w i t h o u t it d u r i n g the G r e a t
Depression.

CAUSES OF THE THRIFT CRISIS
In t h i s s e c t i o n w e i d e n t i f y s i x f a c t o r s t h a t h a v e c a u s e d
the t h r i f t c r i s i s .

O n l y b y i d e n t i f y i n g a n d u n d e r s t a n d i n g the

causes can one p r o p e r l y d e t e r m i n e

the r e f o r m s n e c e s s a r y to be

sure a s i m i l a r s i t u a t i o n ne v e r ag a i n o c c u r s
Bradley
Kane




(1989),

(1989),

Brumbaugh

Scott

(1988)

(1 988),

Carron

[also,

(1988)

and Strunk and Case

see B a r t h a n d

Horvitz

(1988)].

(1989),

12

Chart 5

Ratio of Thrift Failures to All Thrifts
Percent
1930's
1980's

1980

1981

1982

1983

1984

1985

Year

1986

1987

1988

Sources: Barth and Regalia (1988), Barth and Bradley (1989) and Barth,
Feid, Reidel, and Tunis (1989).

Chart 6

Ratio of Losses of Failed Thrifts to
Total Assets
Percent
1930's
1980’
s

Sources: Barth and Regalia (1988), Barth and Bradley (1989) and Barth,
Feid, Reidel, and Tunis (1989).




13

A Rigid Institutional Design
S i n c e t h e i r o r i g i n in 1831,

t h r i f t s h a v e c o n c e n t r a t e d on

g a t h e r i n g s a v i n g s d e p o s i t s a n d p r o v i d i n g h o m e m o r t g a g e l oa ns .
I n f o r m a t i o n o n t he c o m p o s i t i o n tif a s s e t s a n d l i a b i l i t i e s o v e r
the p e r i o d 19 7 9 to 1 98 8 is p r o v i d e d in T a b l e
recently,

thrifts

3.

Until very

r e l i e d h e a v i l y on s a v i n g s d e p o s i t s a n d

i n v e s t e d a l a r g e s h a r e of t h e i r a s s e t s in t r a d i t i o n a l h o m e
mortgages

[see W e i c h e r

(1988)].

But these p ortfolio decisions

have not been entirely voluntary,

for t h r i f t s h a v e b e e n

s u b j e c t e d to n u m e r o u s r e g u l a t o r y c o n s t r a i n t s o n t h e i r a s s e t a n d
liability holdings.
regulations
flexible
branch,

Furthermore,

t h r i f t s h a v e b e e n s u b j e c t e d to

r e g a r d i n g the t y p e s of m o r t g a g e s

rate)

they could provide,

the a r e a s

(e.g.,

f i x e d vs.

in w h i c h t h e y c o u l d

t he r a t e of i n t e r e s t t h e y c o u l d o f f e r on d e p o s i t s ,

and

the e x t e n t to w h i c h t h e y c o u l d e n g a g e in o p t i o n s a n d f u t u r e s
activities.
P r i o r to the 198 0s ,

t h r i f t i n s t i t u t i o n s s p e c i a l i z e d in

g a t h e r i n g d e p o s i t s to f u n d h o m e m o r t g a g e s .

R e g u l a t o r y a n d tax

f a c t o r s e n c o u r a g e d if n o t r e q u i r e d s u c h s p e c i a l i z a t i o n .
income was,

therefore,

Thrift

b a s e d m a i n l y o n the a m o u n t b y w h i c h the

i n t e r e s t r a t e o n h o m e m o r t g a g e s e x c e e d e d the i n t e r e s t rate on
deposits,

net of general and a d m i n i s t r a t i v e expenses.

fixed mortgage

r at e a n d a v a r i a b l e d e p o s i t ra t e a n d the s t a g e is

s e t for a c r i s i s in an u n e x p e c t e d l y h i g h a n d v o l a t i l e
rat e e n v i r o n m e n t .

T hus,

interest

a c a u s e of the c u r r e n t t h r i f t c r i s i s is

a rigid institutional design.




Add a

TABLE 3
T H R I F T IMDCISTRY
COMPOSITION OF GHOSS ASSETS. LIABILITIES - A N D CAPITAL OF ALL THRIFTS
(P E R C E B T O F A S S E T S )
December
1979

1980

1981

1983

198 2

1984

1985

1986

1987

1988

ASSETS
Home Mortgages
Subtotal

3.5

4.4

5.0

8.6

10.9

11.1

10.4

13.1

15.6

68.0

66.5

65.0

56.3

49.8

44 .9

42.4

38.9

37.8

38.6

71. 5

Mortgage-Backed Securities

70.8

70.1

6 4.9

60.7

56.0

52.8

52.0

53.4

53.9

15.4

Multifaaily

6.4

6.0

5.6

5.6

6.0

6.4

6.9

6.8

6.6

6.2

Mortgages on C o a a e r c i a l Real Estate

6.6

6.3

6.2

6.4

7.3

8.4

9.2

8.7

8.3

7.7

M o r t g a g e s for L a n d f L a n d D e v e l o p m e n t
c

0.9

0.9

0.9

1.0

1.5

2.3

2.9

2.6

2.1

1.8

Nonmor t g a g e C o a a e r c i a l Loans

0.2

0.3

0.1

0.1

0.4

1.2

1.5

1.9

1.8

2.4
4.4

Nonaortgage Consumer Loans

2.6

2.7

2.7

2.8

3.0

3.4

4.1

4.2

4.4

Repossessed Assets

0.1

0.2

0.2

0.4

0.5

0.5

0.9

1.3

2.0

2.1

Investment Real Estate

0.2

0.2

0.3

0.4

0.5

0.5

0.6

0.7

0.7

0.5

12.9

13.4

12.9

13.7

13.1

13.5

1.2

1.1

1 .1

• 1.1 -

1.1

1-0

8.1

9.1

9.4

11.4

' 1.3

1.3

1.4

1.3

E q u i t y in S e r v i c e C o r p s . / S u b s i d i a r i e s

0.4

0.5

0.6

0.8

1.0

1.6

1 .9

1.7

1.7

1.7

Goodwill

0.0

0.0

0.3

2.3

2.6

2.3

2.2

2.0

1.9

1.7

Other

1.7

1.7

2.1

2.7

2.5

2.8

3.0

3.1

2.9

3.1

81.1

81.1

78.8

77.6

78.6

77.1

75.9

73.9

71.9

69.8

10.1
71.0

6.6
74.5

7.4
71.4

8.3
69.4

10.4
68.2

11.1
65.9

9.8
66.2

9.7
64.2

9.6
62.3

9.3
60.5

0.3

0.6

0.5

1.1

3.5

4.2

3.7

3.7

4.9

5.1

FHLBank Advances

7.1

7.6

9.6

9.0

6.7

7.0

7.6

8.3

9.0

9.6

Other B o rrowed Money — Total

2.6

2.8

4.1

4.8

4.8

6.5

6.6

8.0

10.3

11.9

1.1
0.6
0.9

1.4
0.6
0.8

1.4
0.5
2.2

1.7
0 .5
2.7

2.7
0.4
1.7

4.5
0.5
1.5

4.0
0.8
1.8

4.9
1.0
2.1

6.5
1.2
2.5

7.1
1.3
3.5

3.6

3.2

3.2

5.0

6.0

5.7

5.7

5.4

4.9

4.3

Regulatory Capital

5.6

5.3

4.3

3.6

3.9

3.7

4.2

4.4

3.9

4.4

GAAP Capital

5.6

5.3

4.2

2.9

3.0

2.6

3.0

3.2

2.6

3.3

Tangible Capital

5.6

5.2

3.9

0.5

0.4

0.3

0.7

1.2

0.7

1.7

Cash, D e p o s i t s a n d S e c u r i t i e s
Fixed Assets

*

LIABILITIES
D e p o s i t s — Total.
More than $100,000
$ 1 0 0 , 0 0 0 or L e s s
Broker O r ig i n a t e d Deposits
( i n c l u d e d in t o t a l )

Reverse Repurchases
M ortgage Back ed Securities Issued
Other Borrowings
Other Liabilities
CAPITAL

Total Assets

( B i l l i o n s of D o l l a r s )

N u a b e r of I n s t i t u t i o n s




567

604

640

686

814

978

1,070

1,164

1,251

1 ,352

4,038

3,993

3,751

3,2 8 7

3,146

3,136

3 ,246

3,220

3,147

2, 9 4 9

15

High and Volatile Interest Rates
In the l a t e 1 9 7 0 s a n d e a r l y 1 9 8 0 s i n t e r e s t

r a t e s rose to

u n e x p e c t e d l y high levels and became e xtremely volatile.
C o n t r i b u t i n g to the f l u c t u a t i o n s in n o m i n a l

interest

rates were

i n f l a t i o n a r y e x p e c t a t i o n s a n d a c t i o n s t a k e n b y the F e d e r a l
Reserve Board.

These movements

affected thrift institutions.

in i n t e r e s t r a t e s s e v e r e l y
C h a r t 7 s h o w s t h a t as i n t e r e s t

r a t e s p e a k e d in t he e a r l y 1 9 80 s,
thrifts plummeted.

Indeed,

the n e t o p e r a t i n g i n c o m e of

85 p e r c e n t of a l l t h r i f t s w e r e

unprofitable in 19 8 1 a n d m o s t w e r e i n s o l v e n t if o n e h a d
"marked-to-market"
As interest

I

their fixed-rate m o rtgage loan portfolios.

rates declined,

net operating income and "market

values"

improved.

With liabilities

repricing more q u i c k l y than

assets,

s h a r p a n d p r o l o n g e d i n c r e a s e s in i n t e r e s t r a t e s ca n

clearly devastate thrifts.

Th us ,

a c a u s e of the c u r r e n t t h r i f t

c r i s i s is h i g h a n d v o l a t i l e

i n t e r e s t r ates.

Deterioration in Asset Quality
W h e r e a s p r o b l e m s in th e e a r l y 1 9 8 0 s w e r e m a i n l y i n t e r e s t ra t e r e l a t e d ,
asset quality.

t h e p r o b l e m s in m o r e r e c e n t y e a r s w e r e m a i n l y
S i n c e T e x a s a c c o u n t s for s u c h a l a r g e s h a r e of

the r e s o l u t i o n c o s t s in 1988,

it is u s e f u l to e x a m i n e ne t

n o n o p e r a t i n g i n c o m e for t h r i f t s in t h i s s t a t e .

Chart 7 shows

t h a t n e t n o n o p e r a t i n g l o s s e s for t h r i f t s in b o t h T e x a s a n d the
U.S.

track one another quite closely from 1985 onwards.

surprisingly,




Not

there has been a h e a v y c o n c e n t r a t i o n of total

C h a r t

7

Net Operating Income vs. Net Nonoperating Income
(1080 - 1988)
($ Millions)
4.000

4.000

2.000

2.000
»

v^/

\

0

o

fo t Operating Income
U.S.
Net Nonoperating Income
U.S.
...........

Net Operating Income vs. 3 Month Treasury Bill Rate
(1980 - 1988)
Net Operating Income ($ Millions)
4.000

T-Bill Rate (Percent)
Net Operating Income

2.000

3 Mo. Treasury
Bill Rate

0

\

(2.000)

(2.000)

(4,000)

%
\
(0.000)
_ _ ___1 ---- ___1 _ ----1
.
(•.000) _1 _ 1 _ 1 ----1 1 _ 1 ---- L— 1

1

•
(2.000)

1
\

I
*

« •

* ■(4.000)
(A O )
.O O

1 —1 i ■■ 1 — (8.000)
.... ■1 -----1
■—

(4.000)

(0.000)




Oil and Gas Extraction Index

*,

J

\ /

x"

tp-tp- tyV* tP't?^tf>-1?^t^V^tFtP^trtr^

Texas Net Nonoperating Income vs. Texas Oil and Gas Extraction
(1980 - 1988)
Net Nonoperating Income ($ Millions)

\

^^ ^i* **
v*

Net Nonoperating Income: U.S. vs. Texas
(1980 - 1988)
($ Millions)

0\

17

industry losses among thrifts

in T e x a s

in r e c e n t y e a r s ,

and most

of t h e s e l o s s e s h a v e b e e n d u e to a s s e t w r i t e - d o w n s a n d a d d i t i o n s
to l o a n l o s s r e s e r v e s .

P l u n g i n g oil p r i c e s a n d real e s t a t e

v a l u e s c o n t r i b u t e d to the s h a r p d e t e r i o r a t i o n in a s s e t q u a l i t y
at T e x a s t h r i f t s .

Thus,

a c a u s e of the c u r r e n t t h r i f t c r i s i s is

a d e t e r i o r a t i o n in a s s e t q u a l i t y .

Federal and State Deregulation
Thrift institutions have been

h e a v i l y r e g u l a t e d for y e a r s .

S u c h r e g u l a t i o n u n d o u b t e d l y g e n e r a t e d m o n o p o l y r e n t s a n d t hu s
e n h a n c e d the m a r k e t v a l u e of t h r i f t s .

B u t it a l s o m a d e t h r i f t s ,

with their

vulnerable

rigid institutional design,

to

u n a n t i c i p a t e d c h a n g e s in e c o n o m i c c o n d i t i o n s a n d to
technological developments.
state-chartered,
regulation.

Being both federally and

t h r i f t s a re s u b j e c t to b o t h f e d e r a l a n d s t a t e

The Congr e s s can l e gi slate

r e q u i r e d r u l e s of

b e h a v i o r for t h r i f t s as w e l l as the f e d e r a l
t h r i f t s — the B a n k B o a r d .
t he C o n g r e s s ,

r e g u l a t o r of

W i t h i n the g u i d e l i n e s e s t a b l i s h e d by

th e B a n k B o a r d c a n t h e n v a r y the r e g u l a t o r y

t r e a t m e n t of t h r i f t s w i t h r e s p e c t to c e r t a i n a c t i v i t i e s .

Thus,

r e g u l a t i o n o f t h r i f t s is the r e s p o n s i b i l i t y of the C o n g r e s s ,
Bank Board,

a n d th e s t a t e s t h a t c h a r t e r t h r i f t

In 1 9 8 0 a n d t h e n a g a i n in 1982,

institutions.

the C o n g r e s s p a s s e d m a j o r

legislation that gave federally chartered thrift institutions
new and expanded powers.

State authorities generally granted

s i m i l a r or e v e n b r o a d e r p o w e r s to s t a t e - c h a r t e r e d t h r i f t s ,
such powers had not already been granted.




the

Table 4 presents

if

Table 4
Restrictions on Thrift Asset Powers
As of December 1987 and December 1988
(Percent of Assets)
All Thrifts
Federal
Restrictions

California
Restrictions

Texas

Federally
Chartered

StateChartered

Actual
Holdings
StateChartered

1987 1988

1987 1988

1987 1988

Actual Holdings

Restrictions

Florida

Actual
Holdings
StateChartered

Restrictions

1987 1988

Actual
Holdings
StateChartered
1987 1988

Consumer Non-Mortgage loans

30

4.6

4.4

3.5

3.9

30

2.4

2.8

Unlimited

3.0

2.9

b/

4.7

6.1

Commercial Non-Mortgage Loans

10

1.8

2.5

2.0

2.3

10

2.2

2.9

Unlimited

2.3

2.8

b/

3.0

2.9

Commercial Real Estate Loans

40

8.4

7.8

9.0

8.0

40

9.2

8.8

Unlimited

10.1

8.3

b/

8.8

6.8

Education Loans

5

0.4

0.3

0.2

0.2

a/

0.0

0.0

Unlimited

0.1

0.2

b/

0.7

0.5

Service Corporations

3

1.2

1.2

3.0

3.0

c/

3.0

4.1

d/

5.1

4.4

20

4.5

2.9

e/

0.2

0.3

1.3

1.0

e/

1.2

0.8

e/

3.3

2.9

e/

0.3

0.3

137

127

211

147

58

53

144

119

82

58

29

33

Equity Risk Investment
Total Number of Thrifts
Total Assets ($ billions)
a/
b/
c/
d/
e/

1,768 1,720
814

965

1,379 1,229
437

389

Included in consumer non-mortgage loan limit.
Any association may make a secured or unsecured loan to any person subject to the requirement that 60% of assets be invested in residential real estate loans,
All service corporation activity requires prior approval from the respective state banking authority,
This limitation may be exceeded with the approval of the respective state banking authority.
Equity risk investment limitations apply to all federally insured thrifts. For thrifts that are in compliance with capital requirements
(i.e., tangible capital to assets > 6%), equity risk investments may be made to a limit of 3 times tangible capital. If the thrift is in compliance with
minimum capital requirements and less than 6X, the limitation is the greater of 3% of assets or 2.5 times tangible capital. If the thrift does not meet
minimum capital requirements, all equjty risk investments require prior approval from the supervisory agent.




19

i n f o r m a t i o n on so m e of the p o w e r s a v a i l a b l e to f e d e r a l l y
c h a r t e r e d t h r i f t s as w e l l as s t a t e - c h a r t e r e d t h r i f t s
states.

in s e l e c t e d

I n f o r m a t i o n r e g a r d i n g the e x t e n t to w h i c h t h e s e p o w e r s

h a v e b e e n u s e d is a l s o p r e s e n t e d .

A l t h o u g h these ex pa n d e d

p o w e r s e n a b l e t h r i f t s to s ee k a d d i t i o n a l s o u r c e s of p r o f i t and
greater

risk d i v e r s i f i c a t i o n ,

they also enable

t h r i f t s to se ek

higher profits through riskier activities.
O n e w o u l d e x p e c t d e r e g u l a t i o n to l e a d to g r e a t e r
c ompetition among thrift institutions and other financial
service

f i rm s.

therefore,

T h e l e g i s l a t i o n p a s s e d in 1 9 8 0 a n d 1 9 8 2 s h o u l d ,

h a v e l e d to a d d i t i o n a l t h r i f t f a i l u r e s .

e x t e n t t h a t the c a s u a l t i e s of the d e r e g u l a t i o n w e r e
institutions,

inefficient

one should not argue against deregulation.

make matters worse,
was

T o the

To

the r i g i d i n s t i t u t i o n a l d e s i g n of t h r i f t s

i n a d e q u a t e to c o p e w i t h the g r e a t e r c o m p e t i t i o n f o s t e r e d b y

s e c u r i t i z a t i o n and, m o r e g e n e r a l l y ,

the r a p i d l y e v o l v i n g

information technologies.
By permitting more competition,
therefore,

d e r e g u l a t i o n can,

l e a d to an i n c r e a s e in t h r i f t f a i l u r e s .

However,

it

c a n a l s o p r o v i d e t h r i f t s w i t h m o r e o p p o r t u n i t i e s to e n g a g e in
r i s k i e r a c t i v i t i e s in s e a r c h of h i g h e r p r o f i t s .
t h e s e r i s k i e r a c t i v i t i e s c a n l e a d to s t i l l m o r e

If p u r s u e d ,
failures.

This

means that w h e n federally insured d e p o s i t s — under a flat-rate
p r e m i u m s t r u c t u r e — ar e b e i n g u s e d to f u n d n e w a c t i v i t i e s ,
regulator must monitor and supervise these activities.
i n a p p r o p r i a t e p r a c t i c e s are detected,
taken by regulators.




the

If

c o r r e c t i v e s t e p s m u s t be

20

T h e B a n k B o a r d d i d i n d e e d ta k e c o r r e c t i v e s t e p s a g a i n s t a
n u m b e r of t h r i f t s d u r i n g the 1 9 8 0s .

As Chart 8 indicates,

the

n u m b e r of f o r m a l e n f o r c e m e n t a c t i o n s i n c r e a s e d d r a m a t i c a l l y
b e t w e e n 1 9 8 0 a n d 1988.
consent-merger

Th e n u m b e r of s u p e r v i s o r y a g r e e m e n t s a n d

resolutions

s t a r t e d to d e c l i n e a f t e r 1 9 8 6 as

t r o u b l e d t h r i f t s w e r e p l a c e d in the m a n a g e m e n t c o n s i g n m e n t
p r o g r a m or r e s o l v e d .

In a d d i t i o n ,

a n u m b e r of " i n f o r m a l "

a c t i o n s w e r e a l s o t a k e n d u r i n g the p e r i o d .
h a s b e e n the t r a d i t i o n a l

While moral

suasion

s u p e r v i s o r y t o o l of the B a n k B o a r d ,

the

n e e d for s u p e r v i s o r y a c t i o n is i l l u s t r a t e d b y th e n u m b e r of
formal enforcement actions that were taken against troubled
t hri f t s .
W h i l e t he n e e d for e x a m i n a t i o n a n d s u p e r v i s i o n is i n c r e a s e d
in an i n c r e a s i n g l y c o m p e t i t i v e a n d d e r e g u l a t e d e n v i r o n m e n t ,
C h a r t 9 s h o w s t h a t the e x a m i n a t i o n s t a f f a n d b u d g e t f a i l e d to
k e e p p a c e w i t h the g r o w t h in t o t a l i n d u s t r y a s s e t s a n d the e n t r y
into new activities.

H i g h l y t r a i n e d a n d w e l l - p a i d e x a m i n e r s a re

not made obsolete by deregulation,

but rather become

i n d i s p e n s a b l e as c o m p e t i t i o n h e a t s u p a n d c a p i t a l

is e r o d e d

a w a y — w h i c h is th e b u f f e r to p r o t e c t t h e i n s u r e r a n d t he f u n d s
at r is k b y t he o w n e r s to c o n t a i n t h e i r p r o c l i v i t y t o w a r d risk.
In sum, w i t h o u t a d e q u a t e s a f e g u a r d s ,

federal and state

d e r e g u l a t i o n is a c a u s e of t h e c u r r e n t t h r i f t c r i s i s .

Fraudulent Practices
T h r i f t i n s t i t u t i o n s c a n f ai l t h r o u g h f r a u d a n d
m i s m a n a g e m e n t b y the m a n a g e m e n t or o w n e r s .




Although difficult

Chart 8
E n f o r c e m e n t

A c t i o n s

o f

t h e

B o a r d

i n

t h e

B a n k
N

u

m




b

e

r

o f

F e d e r a l

H

o

m

e

1 9 8 0 s .

A c t i o n s

250
Cease—
and—
Desist
Orders
Individuals
Removed
Supervisory
Agreements
Consent-Merger
Resolutions

200

150

100

50

0

JXL

1980

1981

1982

1983

1984
Y e a r

1985

1986

1987

1988

L o a n

22

Chart 9

Examination Staff vs. Industry Assets
Number

($ Millions)

Year
Examination Budget vs. Industry Assets
($ Millions)




($ Millions)

Year

23

to d e t e c t ex a nt e,
10 p r e s e n t s

t h e s e f a c t o r s are a s o u r c e of t r o u b l e .

i n f o r m a t i o n on s i g n i f i c a n t c r i m i n a l c o n v i c t i o n s

a s s ociated with failed thrifts.
practices have
the F S L I C

Chart

A s m a y be seen,

fraudulent

i n c r e a s i n g l y p l a y e d a r ole in t h r i f t s

[also,

see B a r t h o l o m e w

(1989)].

r e s olved by

It is for t h i s

reason

t h a t f r a u d u l e n t p r a c t i c e s ar e c o n s i d e r e d to be a c a u s e of the
current thrift crisis.

Federal Deposit Insurance:

Moral Hazard

F e d e r a l d e p o s i t i n s u r a n c e w a s e s t a b l i s h e d in r e s p o n s e to
the w i d e s p r e a d f a i l u r e of b a n k s a n d t h r i f t s d u r i n g the G r e a t
Depression.

Without

w i t h d r a w their
insolvent.

insurance,

d e p o s i t o r s w i l l a t t e m p t to

f u n d s w h e n e v e r t h e y b e l i e v e a b a n k or t h r i f t is

Such withdrawals,

however,

m i g h t n o t be r e s t r i c t e d

to i n s o l v e n t i n s t i t u t i o n s b u t i n s t e a d s p r e a d to s o l v e n t
institutions

(i.e.,

deposit insurance

a contagion).

is that,

The b e n e f i t of f e d e r a l

if s u c c e s s f u l ,

it p r o v i d e s

sufficient

c o n f i d e n c e so t h a t d e p o s i t o r s w i l l n e v e r e n g a g e in a " w i d e s p r e a d
run" on d e p o s i t o r y i n s t i t u t i o n s
Eng la nd (1989)].

However,

[see, h o w e v e r ,

E l y (1989)

t h i s b e n e f i t c o m e s at a c os t.

d e p o s i t o r f u n d s a r e sa f e a n d sound,

therefore,

Since

d e p o s i t o r s do not have any

i n c e n t i v e to i m p o s e d i s c i p l i n e on the u s e of t h e i r
institution,

and

funds .

c a n u s e the d e p o s i t s to e n g a g e

r i s k i e r a c t i v i t i e s t h a n w o u l d o t h e r w i s e be p o s s i b l e .

The

in
Th e

role

of the i n s u r e r or r e g u l a t o r is to c o n t a i n t h i s " m o r a l h a z a r d "
p r o b l e m b y m i m i c k i n g the m a r k e t
r i s k w o u l d do).




(i.e., d o i n g w h a t d e p o s i t o r s at

To the e x t e n t t ha t the r e g u l a t o r d o e s n o t

C h a r t

1 0

S ig n ific a n t Criminal Convictions A ssociated
With Thrift In stitu tio n s
( 1 9 8 3
N

u

m

b

e

-

1 9 8 8 )

r

8 0

6 0

4 0

20
8

6
0




1 9 8 3

1 9 8 4

1 9 8 5
Y e a r

1 9 8 6

1 9 8 7

1

25

properly control
institutions,

the i n c r e a s e d r i s k - t a k i n g b e h a v i o r of

t h e r e c a n be m o r e f a i l u r e s a n d g r e a t e r f a i l u r e

c o s t s t h a n w o u l d be p o s s i b l e w i t h o u t d e p o s i t
Furthermore,

insurance.

as s h o w n m o s t r e c e n t l y b y K e e l e y a n d F u r l o n g

(forthcoming)

and Furlong and Keeley (forthcoming),

the i n s u r a n c e to the t h r i f t i n s t i t u t i o n a n d h e n c e

the v a l u e of

its p r o c l i v i t y

t b w a r d r i s k - t a k i n g b e h a v i o r v a r i e s i n v e r s e l y w i t h the a m o u n t of
c a p i t a l at risk.

T h i s m e a n s t ha t e v e n if o t h e r

t h r i f t s to b e c a m e

i n s o l v e n t or n e a r l y i n s o l v e n t ,

factors cause
deposit

i n s u r a n c e w i l l p e r m i t s u c h t h r i f t s to r e t a i n a c c e s s to f u n d s an d
thus remain open.
crucial,
argued,

The regulators'

as B e n s t o n a n d K a u f m a n

"closure

(1988)

is

in e n s u r i n g t h a t i n s t i t u t i o n s d o n o t " g a m b l e for
Without timely

the o u t c o m e m a y be e v e n g r e a t e r n e g a t i v e n e t w o r t h .

Horvitz and Pettit
still

therefore,

have most forcibly

r e s u r r e c t i o n " w i t h i n s u r e d d e p o s i t o r f u n ds .
closure,

rule,"

(1981,

relevant article,

p.

As

56) p o i n t e d o u t in an e a r l y bu t

"the l o n g e r a n i n s t i t u t i o n l o s i n g m o n e y

is a l l o w e d to c o n t i n u e in o p e r a t i o n ,
c o s t to the i n s u r a n c e f u n d . "

In sum,

the g r e a t e r the u l t i m a t e
federal deposit insurance

is a c a u s e of t h e c u r r e n t t h r i f t c r i s i s .

SORTING THROUGH THE EVIDENCE
A l l of t h e f a c t o r s i d e n t i f i e d in the p r e v i o u s s e c t i o n ,
o n e w a y or a n o t h e r ,

c a u s e d t he t h r i f t c r i s i s of the 1 9 8 0 s .

in
This

s e c t i o n f o c u s e s o n th e s p e c i f i c role p l a y e d b y f e d e r a l d e p o s i t
insurance.
with federal




As a l r e a d y noted, depositor di s c i p l i n e
insurance,

is a b s e n t

w h i c h w a s r a i s e d b y t he C o n g r e s s to

$ 1 0 0 , 0 0 0 f r o m $ 4 0 , 0 0 0 p e r a c c o u n t in 1980.

T h e i n s u r e r or

r e g u l a t o r m u s t t h e r e f o r e i m p o s e a n y n e e d e d d i s c i p l i n e on
thrifts.

A n a t t e m p t w i l l be m a d e to a s s e s s the e x t e n t to w h i c h

i n s u f f i c i e n t d i s c i p l i n e b y the r e g u l a t o r — the B a n k B o a r d ,
Congress,

a n d the s t a t e s — c a u s e d the c r i s i s to be w o r s e

the

than

otherwise.

Required Capital Levels
T a b l e 1 a n d C h a r t 11 p r e s e n t i n f o r m a t i o n o n the n u m b e r of
t h r i f t s a n d t h e i r a s s e t s for v a r i o u s l e v e l s of c a p i t a l i z a t i o n as
w e l l as i n f o r m a t i o n o n a l t e r n a t i v e m e a s u r e s of c a p i t a l
thrifts.

R e g a r d l e s s of the m e a s u r e u s e d ,

of c a p i t a l d u r i n g the e a r l y 1 9 80 s.
required capital levels were

for all

t h e r e w a s an e r o s i o n

D e s p i t e this situation,

r e d u c e d — f r o m 5 to 4 p e r c e n t

N o v e m b e r 1980 and then further

in

r e d u c e d to 3 p e r c e n t in J a n u a r y

!1 9 8 2 — a n d the i t e m s c o u n t i n g as c a p i t a l w e r e b r o a d e n e d t h r o u g h
the u s e of r e g u l a t o r y a c c o u n t i n g p r a c t i c e s
l e s s c a p i t a l at risk,

(RAP).

a thrift has a grea t e r

However,

with

i n c e n t i v e to e n g a g e

in r i s k i e r a c t i v i t i e s f u n d e d b y i n s u r e d d e p o s i t s ,

especially

with a flat-rate insurance premium and a relatively
risk-insensitive capital

requirement.

Delay in Closing Insolvent Thrifts
W h e n t h r i f t s a r e i n s o l v e n t t h e y s h o u l d be c l o s e d
l i q u i d a t e d or m e r g e d ) .

Yet,

y e a r - e n d 1988 but still open.

364 t h r i f t s w e r e i n s o l v e n t at
Furthermore,

as C h a r t 12 sh o ws ,

m a n y of t h e s e t h r i f t s h a d b e e n i n s o l v e n t for y e a r s .




(i.e.,

Indeed,

Chart 11
A

m

o

u

n

t

o f

T h r i f t

C a p i t a l

U s i n g

A l t e r n a t i v e

(1980 - 1988)
( $

B i l l i o n s )

1980

1981

1982

1983

1984

1985

Y e a r

Note:




R = Regulatory Accounting Practices
G = Generally Accepted Accounting Principles
T = Tangible Capital

1986

1987

1988

M e a s u r e s

28

C h a rt 12

Length of Insolvency of GAAP-Insolvent
Thrifts as of D ecem ber 1988

Number of Institutions

Regulatory A ccounting P ra c tic e s

Number of Institutions

80

G enerally Accepted A ccounting P rin cip les

60
40
20
0

Number of Institutions

Tangible Capital




29

som e h a d b e e n i n s o l v e n t m o r e t h a n 10 y e a r s .
" m a r k e t v a l u e " e s t i m a t e s of i n s o l v e n c y ,
measures were
insolvency.

A l t h o u g h no t

these book value

in m o s t c a s e s s t i l l g o o d i n d i c a t o r s of " t r u e "
T h i s p o i n t is r e i n f o r c e d in C h a r t 13, w h i c h s h o w s

the l e n g t h of i n s o l v e n c y for d i f f e r e n t a c c o u n t i n g m e a s u r e s
a ll 205 t h r i f t r e s o l u t i o n s

in 1988.

for

A s u b s t a n t i a l n u m b e r of the

r e s o l v e d t h r i f t s h a d b e e n i n s o l v e n t s i n c e the e a r l y 1 9 80 s.
these institutions been closed much earlier,

Had

o ne c a n o n l y ask

h o w m u c h l e s s c o s t l y t h a n $31 b i l l i o n t h e y w o u l d h a v e b ee n .

I n t e r e s t R a t e s O f f e r e d b y T h r i f t s as S i g n a l s o f T r o u b l e
O n c e in t r o u b l e ,
their deposits
example,

t h r i f t s c an o f f e r

r e l a t i v e l y h i g h r a t e s on

to b o t h r e t a i n a n d a t t r a c t n e w d e p o s i t s

Hirschhorn

(1989)].

C h a r t 14 p r e s e n t s

[see,

for

i n f o r m a t i o n on

d e p o s i t r a t e s o f f e r e d in D e c e m b e r 1 9 8 7 b y the 2 05 t h r i f t s
r e s o l v e d in 19 88 ,

the 50 c o s t l i e s t r e s o l u t i o n s ,

o p e n at y e a r - e n d 1988.

A c r o s s all m a t u r i t i e s ,

thrifts were offering substantially higher
thrifts.

a n d all t h r i f t s
the m o s t t r o u b l e d

r a t e s t h a n all o t h e r

Such hi g h rates can a d v e r s e l y affe c t c o m p e t i n g

i n s t i t u t i o n s as w e l l as e n a b l e a t h r i f t to o b t a i n the f u n d s
n e c e s s a r y to " g a m b l e for r e s u r r e c t i o n . "

Offering higher

rates

to r e t a i n f u n d s a l s o e n a b l e s a t h r i f t to a v o i d s e l l i n g a s s e t s at
prices b e l o w book value,
lower capital




levels.

t h e r e b y n o t h a v i n g to r e p o r t l o s s e s a n d

30

Chart 13

1988 Thrift Resolutions
Length of Insolvency

Number

o Institutions
f

Regulatory Accounting Practices

Years Insolvent

Number

o Institutions
f

Generally Accepted Accounting Principles

<1

1-2

2-3

3-4
4-5
Years Insolvent

60 i ----------------------------------------

Number

of Institutions

Tangible Capital




Years Insolvent

5-6

6-7

>7

C h a rt 14
D e p o s i t

R a t e s

B a l a n c e s

f o r

F i x e d - T e r m

G r e a t e r

t h a n

A c c o u n t s

$ 1 0 0 , 0 0 0

(D ecem ber 1987)

Average Interest Rate
9




8.5

All Thrifts Open
at Y ear-en d 1988
All 1988 Resolutions

8

7.5

6.5 ■ 1
—

Costliest 1988
Resolutions

32

S e l e c t e d C h a r a c t e r i s t i c s of 1 9 8 8 T h r i f t R e s o l u t i o n s
C h a r t 15 p r e s e n t s
thrift resolutions

s e l e c t e d c h a r a c t e r i s t i c s of al l 2 05

in 19 8 8 as w e l l as the 50 c o s t l i e s t .

h a l f or m o r e of t h e s e i n s t i t u t i o n s w e r e
net worth basis

Since

i n s o l v e n t on a t a n g i b l e

3 or m o r e y e a r s p r i o r to r e s o l u t i o n ,

o n e h a s to

be c a r e f u l w h e n d e t e r m i n i n g w h e t h e r th e i d e n t i f i e d
c h a r a c t e r i s t i c c o n t r i b u t e d to the f a i l u r e or w h e t h e r

the la c k of

t i m e l y c l o s u r e p e r m i t t e d the i n s t i t u t i o n to c h a n g e its p o r t f o l i o
composition.

If the l a t t e r ,

the t h r i f t h a d t i m e to p u r s u e an

e n d - g a m e s t r a t e g y t h a t m a y h a v e i n c r e a s e d th e f a i l u r e c o s t s .
T he p r e v a l e n c e of the i d e n t i f i e d c h a r a c t e r i s t i c s may,
n o t i n d i c a t e the a c t u a l c a u s e s of f a i l u r e ,

therefore,

b u t r a t h e r the c a u s e s

of h i g h e r f a i l u r e c o s t s .

R e s o l u t i o n C o s t s of State and F e d e r a l l y C h a r t e r e d T h r i f t s
C h a r t 16 p r e s e n t s i n f o r m a t i o n on th e r e s o l u t i o n c o s t s o v e r
the p e r i o d 1 9 8 0 t h r o u g h 19 8 8

for b o t h s t a t e - a n d f e d e r a l l y

c h a r t e r e d t h r i f t i n s t i t u t i o n s at the t i m e of i n s o l v e n c y .
Clearly,

state-chartered institutions have imposed greater costs

u p o n the F S L I C t h a n f e d e r a l l y c h a r t e r e d i n s t i t u t i o n s .
n o t h i n g else,
Board,

t h i s f a c t s u g g e s t s t h a t a ll

the C o n g r e s s ,

r e g u l a t o r s — the B a n k

a n d the s t a t e a u t h o r i t i e s — m u s t a c c e p t some

of t he b l a m e for t he t h r i f t c r i s i s of the 1 9 8 0 s .




If

C h art 15

Percent of
Resolutions

S e le cte d C h a r a c t e r is t ic s of
1988 Thrift R e so lu tio n s

100

80

60 -

U)
u

40

20

0




Greater T h u
Twice the
Industry Aver*f«
Proportional
Holdings of
Direct Investment

Greater Than
Twice the
Industry Avenge
Proportional
Holdings of
Brokered Deposits

34

Chart 16

Resolution Costs of State and F e d e ra lly Chartered Thrifts
$ M illions

L

1.900

100
.0

1980

1981

1988

1989

1984

1985

1988

1987

N o te: 1 9 0 0 f i g u r e s a r e p r e lim in a r y .

State and Federally Chartered Thrift Resolutions
N um ber o f T h rifts




49

i

A
1980

1981

24

3

19

L
1988

n
1989

f

e
1984

a
198S

l

23

l
1987

35

C h a n g i n g P o r t f o l i o C o m p o s i t i o n of 1988 R e so l u t i o n s :

1979-1988

Insolvent and m a r g inally solvent thrift institutions
r e m a i n e d o p e n for y e a r s d u r i n g the 1 9 8 0s .

Insufficient monetary

a n d h u m a n r e s o u r c e s are p a r t of the r e a s o n for the f a i l u r e to
resolve

(i.e.,

However,

l i q u i d a t e or m e r g e )

m a n y of t h e s e i n s t i t u t i o n s .

t h e r e a r e u n d o u b t e d l y o t h e r f a c t o r s as w e l l .

T he w a y

in w h i c h f e d e r a l d e p o s i t i n s u r a n c e c a n c r e a t e p r o b l e m s

is b e s t

u n d e r s t o o d b y e x a m i n i n g the r e l a t i o n s h i p b e t w e e n a m a r k e t - b a s e d
m e a s u r e of ri s k a n d the c a p i t a l l e v e l of a t h r i f t .
risk m e a s u r e

is n o t a v a i l a b l e here,

an e x a m i n a t i o n of the

c h a n g i n g p o r t f o l i o c o m p o s i t i o n of t h r i f t s
conducted.

The

Since such a

r e s o l v e d in 19 8 8 is

r e s u l t s a re r e p o r t e d in T a b l e 5 a n d C h a r t 17,

w h e r e the p o r t f o l i o c o m p o s i t i o n is p r o v i d e d for 1 9 7 9 : I V ,

then

w h e n the G A A P c a p i t a l - t o - a s s e t

and

r a t i o e q u a l s 1.5 p e r c e n t ,

f i n a l l y at the t i m e of r e s o l u t i o n .

As capital deteriorates,

i n c e n t i v e to g a m b l e w i t h i n s u r e d d e p o s i t s
incentive

increases.

the

T he

is g r e a t e r w h e n t h e r e is no c a p i t a l a n d y e t the

i n s t i t u t i o n is l e f t o p e n w i t h the s a m e m a n a g e m e n t a n d / o r
ownership.

To our knowledge,

no on e h a s y e t p r o v i d e d e m p i r i c a l

e v i d e n c e t h a t t h i s i n d e e d h a p p e n e d d u r i n g the t h r i f t c r i s i s in
the 1 9 8 0 s .
A c c o r d i n g to T a b l e 5 a n d C h a r t 17,

the t h r i f t s t h a t w e r e

r e s o l v e d in 1 9 8 8 d i d i n d e e d m o v e h e a v i l y i n t o d i r e c t

investment

a n d a c q u i s i t i o n a n d d e v e l o p m e n t l o a n s as t h e i r c a p i t a l d e c l i n e d .
Furthermore,

the c o s t l i e s t r e s o l u t i o n s m o v e d m u c h m o r e h e a v i l y

into these assets.




To the e x t e n t t h a t t h e s e t y p e s of

TABLE 5
CHANGING PORTFOLIO COMPOSITION OF 1988 RESOLUTIONS:
(PERCENT OP ASSETS)

1979-1988
Acquisition &
Development
Loans

Quarter
Reported

Number of
Institutions

Hortgages

Mortgage-Backed
Securities

1979:IV

All-170
Costliest-37

71.9
69.9

2.2
2.7

0.7
0.8

All-205
Costliest-50

48.3
44.2

9.1
8. 2

4.4
9.0

15.6

29.5
23.1

All-205
Costliest-50

43.8
29.4

7.8
7.4

4.3
8.1

5.6
9.0

38.0
46.1

GAAP/TA = 1.5Z
Time of
Resolution

Note:




Di rect
Investaent

Soae institutions resolved in 1988 were not in existence in 1979.

1.2

1.6
8. 6

Other
Assets
23.9
24.9

C h a r t 17

P o r t f o l i o

C o m p o s i t i o n

1 9 8 8

o f

C o s t l i e s t

R e s o l u t i o n s

Percent of Assets
80%

Mortgages
Mortgage-Backed
Securities
Direct
Investment
Acquisition and
Development Loans

60 -

40 -

20

-

0
1979:IV

GAAP/TA = 1.5%

Quarter Reported
Note:

Some Institutions resolved in 1988 were
not in existence in 1979.




Time of Resolution

38

investments substantially increased overall portfolio
is e v i d e n c e

risk,

this

t h a t m o r a l h a z a r d c o n t r i b u t e d to th e f a i l u r e s a n d

failure costs.

T h i s t y p e of e v i d e n c e is, h o w e v e r ,

certainly

s u b j e c t to d i s p u t e a n d t h u s s h o u l d be v i e w e d as p r e l i m i n a r y at
best.

Nonetheless,

w a y in w h i c h d e p o s i t
alter

it is e m p i r i c a l

information

r e g a r d i n g the

i n s u r a n c e m a y e n a b l e a n i n s t i t u t i o n to

its p o r t f o l i o as its c a p i t a l e r o d e s awa y.

ASSESSING THE SIGNIFICANCE OF RESOLVED THRIFT CHARACTERISTICS
It h a s b e e n s h o w n t h a t t h r i f t i n s t i t u t i o n s do i n d e e d c h a n g e
the c o m p o s i t i o n of t h e i r p o r t f o l i o s as c a p i t a l d e t e r i o r a t e s .
Furthermore,

it h a s b e e n s h o w n t h a t the 2 05 t h r i f t s t h a t w e r e

r e s o l v e d in 1 9 8 8 w e r e g e n e r a l l y i n s o l v e n t y e a r s e a r l i e r .
institutions,

therefore,

These

h a d a m p l e t i m e to t a k e a d v a n t a g e of the

i n s u r e d s t a t u s of t h e i r d e p o s i t s

to " g a m b l e for r e s u r r e c t i o n . "

T h e d e p l e t e d f u n d s of the F S L I C a n d i n a d e q u a t e e x a m i n a t i o n a n d
s u p e r v i s i o n in the e a r l y 1 9 8 0 s ,

moreover,

h e l p e d p r o v i d e the

o p p o r t u n i t y for m a n y t h r i f t s to t ak e the g a m b l e .
e v i d e n c e that,

There

is

b y - a n d - l a r g e , the r e s o l v e d t h r i f t s in 1 9 8 8

e n g a g e d in j u s t t h i s t y p e of b e h a v i o r .

It h a s b e e n f o u n d t h a t

their portfolios changed significantly away from traditional
m o r t g a g e s a nd t o w a r d d i r e c t i n v e s t m e n t a nd a c q u i s i t i o n and
d e v e l o p m e n t loans.

Yet, w h e t h e r t h e s e p a r t i c u l a r a s s e t s w e r e

a s s o c i a t e d w i t h i n c r e a s e d p o r t f o l i o r i s k is s t i l l a d e b a t a b l e
issue.




39

In an a t t e m p t to d e a l m o r e d i r e c t l y w i t h t h i s
individual

thrift

resolution costs

in 19 8 8 w e r e

issue,

r e g r e s s e d on

direct investment and acquisition and d e v e l opment loans
see B a r t h ,

Brumbaugh,

Brumbaugh,

and Sauerhaft

overall

risk,

Sauerhaft,

and Wang

( 1 9 86 )] .

the

(1 985),

[also,

and Barth,

If t h e s e a s s e t s d i d i n c r e a s e

o n e w o u l d e x p e c t t h e m to be s t a t i s t i c a l l y

fx

s i g n i f i c a n t d e t e r m i n a n t s of the c o s t s i m p o s e d u p o n the F S L IC .

j

More generally,

I
I
I

o n e c a n u s e s u c h r e s o l u t i o n c o s t d a t a in an

a t t e m p t to d e t e c t the e f f e c t of m o r a l h a z a r d o n the f e d e r a l
i n s u r e r a n d to a d d r e s s o t h e r

issues

Bernard,

(1 98 9) ].

Pirrong,

and Snyder

[see,

T a b l e 6 p r e s e n t s the e m p i r i c a l
A s m a y be seen,

for e x a m p l e ,

K o rm en d i , |

r e s u l t s of s u c h an exercise.,

both direct investment and a c q u i sition and

'
I
I

I
j

development loans have a positive and statistically significant
e f f e c t on r e s o l u t i o n c o s ts .

W h e n the 1 98 8

m ov e d h e a v i l y into these assets,

resolved thrifts

th i s c h a n g e in p o r t f o l i o

c o m p o s i t i o n d i d i n d e e d p r o v e to be q u i t e c o s t l y to the F S L I C
[see,

however,

(1988)].

Benston

Furthermore,

(1 989),

and B e n s t o n and B r u m b a u g h

the e m p i r i c a l

r e s u l t s s h o w t h a t the le ss

t a n g i b l e c a p i t a l a t h r i f t had,

the m o r e c o s t l y w a s the

resolution.

the l o n g e r the p e r i o d of

insolvency,

A t th e s am e time,

t he g r e a t e r the r e s o l u t i o n c o s t s .

not s u r p rising that higher capital

It is,

therefore,

requirements and more timely

c l o s u r e p o l i c i e s a r e m e n t i o n e d as w a y s to p r e v e n t a r e c u r r e n c e
of the t h r i f t c r i s i s of the 1 9 8 0s .

Of c o u r s e ,

appropriate

i n f o r m a t i o n a n d t h e l e g a l a u t h o r i t y ar e n e c e s s a r y to i m p o s e s u c h
requirements and i m p l e m e n t s u c h policies.




It is a l s o s e e n th at

^

40

TABLE 6
THE EFFECT OF MORAL HAZARD
ON THRIFT RESOLUTION COSTS
Variable to be explained:

Cost of Resolution (millions of dollars)
All Resolutions for vhich Complete
Information Available

Variable
Description

Coefficients
(Standard Errors)
____________ [t-statistics]__________
-24.3

Constant
1.0

-

Tangible Net Worth:
Last Quarter Reported

I
0.4

Months of Tangible
Insolvency

f§:il

Dummy Variable:
If Fraud Present,
DFRAUD = 1

16.3
(8 . 0 )
[2 . 0 ]
1.0

Direct Investment:
Last Quarter Reported

f°:il
0.4

Acquisition & Development
Loans: Last Quarter Reported

m

-0.4
(0 . 1)
1-3.51

Brokered Deposits:
Last Quarter Reported

-

0.1

Average Annual Grovth
Rate: 1983-1985

1- 0 . 6 ]

Dummy Variable:
If in Management Consignment
Program, DMCP = 1

-9.4
(9.3}
[-1.0]

Dummy Variable:
If Closely Held Stock
Institution, DCLOSB = 1

( 12 . 2 )

(0 . 1 )

15.9

[1.3]
0.6

Tax Benefits Granted to
Acquirer

m

o.i

Tax Benefits Rebated to
FSLIC

21.5

Dummy Variable:
If Resolution Came Under
Southvest Plan, SVP = 1

(1:11
5.4

Dummy Variable:
If Resolved in December,
DEC = 1




ifcli
N

120

R2

.957

F sI a t i s t I r

70S. 6

41

the p r e s e n c e of f r a u d s i g n i f i c a n t l y i n c r e a s e d r e s o l u t i o n co sts.
Beyond these factors,

onl y two other factors are s i g n i f i c a n t

d e t e r m i n a n t s of c o s t s .
average,

Southwest Plan re solutions were,

on

m o r e c o s t l y a n d t h r i f t s w i t h h i g h e r l e v e l s of b r o k e r e d

deposits were,

on average,

le s s c o s t l y .

A l t h o u g h still preliminary,

these results are c o n s i s t e n t

w i t h the v i e w t h a t f e d e r a l d e p o s i t i n s u r a n c e c r e a t e d a m o r a l
h a z a r d p r o b l e m t h a t w a s i n s u f f i c i e n t l y c o n t a i n e d in the 1 980s.
As a result,

o n e s h o u l d h a v e e x p e c t e d m o r e f a i l u r e s and,

more importantly,

far g r e a t e r

o t h e r w i s e b e e n the case.

failure costs than would have

A s E d w a r d K a n e h a s b e e n a r g u i n g for

y e a r s — q u o t i n g f r o m o n e of h i s m o r e
economic environment

perhap

r e c e n t a r t i c l e s — "In an

in w h i c h d e p o s i t i n s t i t u t i o n s ar e h i g h l y

l e v e r e d a n d e n t e r i n g n e w b u s i n e s s e s e v e r y d a y a n d in w h i c h
interest rates are h i g h l y volatile,

systematically mispricing

deposit-insurance guarantees encourages deposit-institution
m a n a g e r s to p o s i t i o n t h e i r f i r m s on the e d g e of f i n a n c i a l
disaster"

[K a n e

( 1 9 8 6 ) , p. 100].

Much work

r e m a i n s to be d o n e

to c o n f i r m or d i s c o n f i r m t h e s e f i n d i n g s .
B a s e d u p o n t he t h e o r e t i c a l a n d e m p i r i c a l w o r k to d a t e ,

it

a p p e a r s t h a t i n s u f f i c i e n t c a p i t a l a n d the l a c k of a t i m e l y
closure

rul e w e r e m a j o r c a u s e s of the t h r i f t c r i s i s .

T he B a n k

B o a r d r e s p o n d e d to t h i s s i t u a t i o n in l a t e 19 8 8 b y p u t t i n g o u t
for c o m m e n t a p r o p o s a l

for a n e w a n d h i g h e r c a p i t a l

t h a t is r i s k - a d j u s t e d as w e l l as a p r o p o s a l
intervention.

for e a r l y

Fo r w i t h o u t c a p i t a l a n d y e t l e f t o p e n to o p e r a t e

with insured deposits,




requirement

t h r i f t s h a d s t r o n g i n c e n t i v e s to m o v e

42

into riskier activities.

A t the t i m e of r e s o l u t i o n ,

of c o u r s e ,

o n e w o u l d f i n d the r i s k i e r a s s e t s on the b o o k s of t h r i f t s a n d be
s t r o n g l y t e m p t e d to b l a m e t h o s e a s s e t s — or d e r e g u l a t i o n — for the
problem.

However,

the o b v i o u s c o n c l u s i o n is n o t a l w a y s the

c o r r e c t one.

SUMMARY AND CONCLUSIONS
T h r i f t s d e v e l o p e d in the U n i t e d S t a t e s m o r e t h a n 150 y e a r s
ago.

They grew and prospered by offering financial

generally available elsewhere.

services not

It is u s u a l l y o v e r l o o k e d t h a t

t h i s w a s d o n e in a n e s s e n t i a l l y u n r e g u l a t e d e n v i r o n m e n t
Barth and Regalia

(1988)].

[see

Thrifts structured their balance

s h e e t s a n d e s t a b l i s h e d a t y p e of o w n e r s h i p t h a t w a s d e s i g n e d to
produce minimum disruption.
disruptions:

in the 1890 s,

D e s p i t e this,
the 1 9 30 s,

there were

a n d a g a i n in the 19 8 0 s .

A l t h o u g h there were only three wid e s p r e a d disruptions,

their

s e v e r i t y w a s e n o u g h to b r i n g a b o u t m a j o r l e g i s l a t i v e a n d
a s s ociated regulatory action.

This action un d o u b t e d l y corrected

s o m e of th e p r o b l e m s a n d p r e v e n t e d s t i l l m o r e p r o b l e m s
developing.

T h e i ss u e ,

of c o u r s e ,

from

is w h e t h e r th e g o v e r n m e n t

a c t i o n a l s o s e t th e s t a g e for s t i l l f u r t h e r p r o b l e m s

in the

future.
T h i s p a p e r h a s a t t e m p t e d to a d d r e s s t h i s i s s u e b y f o c u s i n g
on th e m o r a l h a z a r d p r o b l e m c r e a t e d b y f e d e r a l d e p o s i t
insurance.
1980s.

M a n y f a c t o r s c o n t r i b u t e d to the t h r i f t c r i s i s of the

T h i s f a c t is w e l l k n o w n .

But empirical evidence

p e r t a i n i n g to t he w a y in w h i c h the e x i s t e n c e of d e p o s i t




43

insurance itself exacerbated,

if n o t a c t u a l l y c a u s e d ,

is to o u r k n o w l e d g e n o n e x i s t e n t .
v oi d,

In a n a t t e m p t to fi l l t hi s

e v i d e n c e has been p r e s e n t e d that shows that cap i t a l -

d e f i c i e n t t h r i f t s n o t o n l y h a v e a n i n c e n t i v e to e n g a g e
r i s k i e r a c t i v i t i e s w i t h i n s u r e d funds,
so.

the c r i s i s

in

b u t a p p e a r to h a v e d o n e

It h a s a l s o b e e n f o u n d t h a t the a s s e t s t h a t t r o u b l e d

t h r i f t s m o v e d m o r e h e a v i l y i n t o i m p o s e d h i g h e r c o s t s u p o n the
insurer once they were resolved.

Certainly much more empirical

w o r k n e e d s to be p e r f o r m e d in th i s a re a ,

b u t for n o w it a p p e a r s

t h a t f e d e r a l d e p o s i t i n s u r a n c e i t s e l f is a m a j o r c u l p r i t in the
1980s thrift crisis.

E v e n so, a g a i n s t t h i s c o s t m u s t be w e i g h e d

the b e n e f i t of h a v i n g i n s u r a n c e in p l a c e to p r e v e n t a c o m p l e t e
l o s s of c o n f i d e n c e

in ou r n a t i o n ' s d e p o s i t o r y i n s t i t u t i o n s a n d

thus w i d e s p r e a d dep os it or
economy.

And,

ru n s t h a t c a n s e v e r e l y d i s r u p t an

a c c o r d i n g to G e o r g e K a u f m a n

(1987,

p . 24),

" A l t h o u g h t he i n c e n t i v e - f o r - r i s k - t a k i n g p r o b l e m a r i s e s f r o m
federal deposit insurance,
t he s o l u t i o n . "




a b o l i t i o n of f e d e r a l i n s u r a n c e is n o t

44

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