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Working Paper 9112
TROUBLED SAVINGS AND LOAN INSTITUTIONS:
VOLUNTARY RESTRUCTURING UNDER INSOLVENCY
by Ramon P. DeGennaro, Larry H. Lang, and James B. Thomson

Ramon P. DeGennaro is an assistant professor of
finance at the University of Tennessee. Larry
H. Lang is an assistant professor of finance in
the Stern School of Business, New York University.
James B. Thomson is an assistant vice president
and economist at the Federal Reserve Bank of
Cleveland. This research was begun while Professor
DeGennaro was a visiting scholar at the Federal
Reserve Bank of Cleveland. The authors thank
Harold Black, Mitch Berlin, Michael Bradley, M.
Cary Collins, Silverio Foresi, Bob Grotch, Joe
Haubrich, Steve Kaplan, Jiang-Ping Mei, Eli Ofek,
Patricia Rudolph, and Ronald Shrieves for helpful
comments. They also acknowledge the research
assistance of Aris Athanassiou, Ralph Day, and
Christopher Pike.
Working papers of the Federal Reserve Bank of
Cleveland are preliminary materials circulated
to stimulate discussion and critical comment.
The views stated herein are those of the authors
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.
September 1991

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Abstract

Regulatory agencies are unwilling or unable to close thrift institutions
immediately upon insolvency. Instead, they have progressively reduced the
thrift capital requirement, refrained from enforcing that requirement, and
allowed thrifts to hold more nonmortgage loans in the hope that the industry
would recover. According to this study, only 13 percent of the largest 300
firms eventually recovered between the end of 1979 and the end of 1989. When
the thrift crisis surfaced in the early 1980s, the firms that ultimately
recovered operated in a fashion similar to those that eventually failed. But
in the mid-1980s, recovered thrifts pursued a risk-minimizing strategy, while
nonrecovered thrifts pursued a risky, high-growth strategy. We find no
evidence that managers of unsuccessful firms consumed more perquisites than
their successful counterparts.

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1. Introduction
Throughout the 1980s and into the 1990s, the thrift industry (savings
and loans [S&Ls] and mutual savings banks) was plagued by severe problems that
led to massive numbers of insolvencies and bankrupted the government fund
established to insure the industry' s deposits.l

Public concern about the

enormous cost of the cleanup, though certainly justified, obscured an
important fact: Unlike industries that require insolvent institutions to
renegotiate with creditors immediately or under Chapter 11 protection (see
Gilson et al. [1991]), thrifts often operate in an insolvent condition for
extended periods. Although most undercapitalized thrifts remain weak or
eventually fail, some do successfully rebuild their capital ratios to levels
exceeding the regulatory minimum. This study investigates the restructuring
strategies adopted by these recovered institutions and compares them to the
operating strategies of thrifts that failed.
Although many factors contributed to the thrift industry's demise, two
are generally considered most important: interest-rate risk and credit risk.

The industry's policy of funding long-term loans (principally mortgages) with
short-term financing (principally deposits) makes it vulnerable to unexpected

Ely (1989) reports that as of June 30, 1989, 538 thrifts were insolvent,
while taxpayer losses stemming from failure of the Federal Savings and Loan
Insurance Corporation (FSLIC) are projected to be in the hundreds of billions
of dollars. Pauley (1989) estimates the cost of disposing of approximately
500 insolvent institutions as $124 billion at mid-year 1989. Other estimates
range from $50 billion (Barth et al. [1990]) to as much as $150 billion (Kane
[1989]). Benston and Kaufman (1990) point out that the $115 billion provided
by the Financial Institutions Reform, Recovery, and Enforcement Act is 50
times larger than the cost of the celebrated bailout of New York City in 1975
and 80 times larger than the cost of the Chrysler rescue in 1979.

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increases in interest rates. Short-term rates reached 20 percent in 1979;
three years later, according to a 1987 U.S. General Accounting Office (GAO)
report, unexpected rate increases had inflicted large capital losses on
thrifts having negative duration gaps. For many of these firms, however, the
losses were largely offset by the unexpected decrease in rates (and the lower
volatilities of those rates) later in the year.
Although interest-rate risk was the major source of thrifts' losses in
the first half of the 1980s, credit risk became the dominant factor behind the
industry's woes during the second half of the decade. By 1987, the
deteriorating quality of assets in thrift portfolios, particularly real estate
investments in the Southwest, accounted for virtually all of the industry's
remaining problems.
From the late 1970s through mid-1989, regulators, gambling that
unexpectedly lower interest rates would restore thrift institutions to health,
progressed through several stages in their attempts to resolve the crisis.
The required capital ratio was reduced from about 5 percent to virtually zero
between 1980 and 1986, and regulators even permitted a number of thrifts
deemed insolvent under regulatory accounting principles (RAP) to continue
to operate. Despite the potential problems inherent in such a policy, this
action gave the industry two important advantages: First, beginning in the
early 1980s, the policy granted thrifts expanded investment and lending powers
with which to restructure their business strategies. Second, although many of
these new powers were restricted by early 1985, thrifts were given an extended
period in which to rebuild their capital ratios.

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Granting new powers and the time to implement them did not change the
incentive structure that the industry faced, however. The FSLIC continued to
provide deposit insurance at rates independent of risk. In addition, staffing
reductions at the Federal Home Loan Bank Board (FHLBB) meant fewer examiners
and thus less-stringent monitoring. Under these conditions, theory suggests
that thrift managers will take larger risks, even if the expected return is
not commensurate with those risks.2 Therefore, it was not clear a priori
that the industry would utilize its newfound advantages to retrench and
restructure in an attempt to regain solvency. Thrifts could have chosen to
engage in risky operations that would have eroded their portfolio quality and
endangered their recovery.
Our study shows that almost all of the largest 300 thrifts posting
capital deficiencies at the end of 1979 utilized the flexibility granted by
the lower required capital ratio, yet only 13 percent had recovered by the end
of 1989. In contrast, more than half (55 percent) of the institutions had
failed or merged.

The remaining thrifts continued to operate, but with less

capital than required in 1979. Even with continued regulatory forbearance, we
find no evidence that their condition improved.
Unlike previous studies, which examine differences between

For example, see Buser et al. (1981), Marcus (1984), Ronn and Verma
(1986), Flannery (1991), and Keeley (1990). John et al. (1991) and Ritchken
et al. (1991) illustrate the importance of frequent monitoring.
See, for example, Benston (1985), Barth and Bradley (1989), Barth et al.
(1990), Cole et al. (1991), and Kane (1989).

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insolvent and well-capitalized firms, this one looks at differences between
insolvent firms that recover and those that do not. Three conclusions emerge:
First', our evidence suggests that identifying which firms will eventually
recover would at best be very difficult. Combining our results with those of
the earlier studies, we find that although it is relatively easy to
distinguish undercapitalized thrifts from safe ones, pinpointing which of the
zombie institutions will ultimately recover may not be possible using only
financial data. Second, differential use of the new investment policies does
not distinguish recovered firms from failed institutions. However,
unsuccessful firms do take on more asset risk and tend to hold a riskier
deposit pool, which jeopardizes their portfolio quality and their recovery.
Finally, we find no evidence that nonrecovered thrifts consume more perks than
their more successful counterparts. This implies that managers of failed
firms are no more susceptible to principal-agent problems than managers of
successful ones; rather, they may simply be less fortunate or less adept at
operating thrift institutions.

2. Institutional Background and Hypotheses Testing
2.1 The Rise and Fall of the S&L Industry
The National Housing Act of 1934 established the FSLIC and limited
deposit insurance coverage to $5,000 per account. This limit was
progressively increased to $40,000 over the next 40 years and was then hiked
to its current level of $100,000 by the Depository Institutions Deregulation
and Monetary Control Act of 1980 (DIDMCA).

Because customers can establish

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multiple accounts while availing themselves of technology that makes spreading
funds across several insured institutions easy, essentially all thrift
deposits are federally insured. Kormendi et al. (1989) report that as of
September 1988, the FSLIC explicitly insured about $1.3 trillion in S&L
deposits.
The thrift industry's traditional policy of funding long-term,
fixed-rate mortgages with short-term deposits was generally profitable during
the relatively tranquil period that preceded the mid-1960s. Although this
strategy made thrifts vulnerable to unexpected increases in interest rates,
such upticks were, until then, historically unlikely. The solvency crisis of
the 1960s was followed by more severe losses in the late 1970s, when rapid
inflation led to unexpectedly higher interest rates. By 1982, short-funded
institutions were experiencing huge capital losses that drove many into
insolvency, since thrifts had traditionally operated with relatively low
capital levels.
The incentive effects of flat-rate deposit insurance magnify both the
potential and the realized problems connected with the factors listed
above . 4

Merton (1977) models insurance as a put option, and it is well

known that the value of options increases with volatility. Thus, although
insurance is worth more to riskier thrifts, flat-rate pricing means that they
pay no more for it than other institutions. Kane (1985) and Kormendi et al.
(1989) argue that this incentive is particularly powerful for insolvent or

Emerson (1934) identified certain of these problems within a year after
the Glass-Steagall Act of 1933 instituted deposit insurance.

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n e a r l y i n s o l v e n t f i r m s , and empirical evidence supports t h e i r claim.

For

example, Brewer (1990) f i n d s t h a t r i s k y t h r i f t s t h a t adopted s t i l l r i s k i e r
s t r a t e g i e s obtained h i g h e r s t o c k r e t u r n s than l o w e r - r i s k t h r i f t s t h a t pursued
similar strategies.

This r e s u l t i s c o n s i s t e n t with t h e n o t i o n t h a t owners of

t h i n l y c a p i t a l i z e d f i r m s would r a t h e r place t h e i n s u r e r ' s c a p i t a l a t r i s k than
t h e i r own.

By 1987, i n t e r e s t - r a t e - r e l a t e d c a p i t a l l o s s e s had been mostly

e l i m i n a t e d o r r e s t o r e d , b u t t h e c r e d i t q u a l i t y of t h r i f t a s s e t s had
d e t e r i o r a t e d d r a m a t i c a l l y , accounting f o r v i r t u a l l y a l l of t h e i n d u s t r y ' s
remaining problems.
I n p r i n c i p l e , an i n s u r e r can p r o t e c t i t s e l f by charging s u f f i c i e n t l y
high premiums and by t a k i n g s t e p s t o reduce i t s l o s s exposure ( f o r i n s t a n c e ,
by a s s i g n i n g s t a f f members t o supervise those t h r i f t s most l i k e l y t o take
r i s k s unacceptable t o t h e i n s u r e r ) .

However, a s Kane (1985) and Kormendi e t

a l . (1989) n o t e , d e p o s i t insurance c o n t r a c t s do n o t include any of t h e
standard methods t o accomplish t h i s , a s t h e r e a r e no p r o v i s i o n s f o r
d e d u c t i b l e s , coinsurance, o r enforced l i m i t s on coverage.
The i n c e n t i v e problems a s s o c i a t e d with d e p o s i t insurance a r e a l s o
magnified by s c a r c e r e g u l a t o r y resources.

Benston and Kaufman (1990), among

o t h e r s , claim t h a t t h e r e l a t i v e l y small number of FSLIC examiners could n o t
have prevented the p l e t h o r a of f i n a n c i a l l y d i s t r e s s e d t h r i f t s from engaging i n
r i s k y o p e r a t i o n s , e s p e c i a l l y during t h e period examined h e r e .

Fraud and

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managerial incompetence further exacerbate these problems.5

2.2 Resolution of the Crisis
In the early 1980s, most thrifts in financial straits suffered losses
due to unanticipated increases in interest rates. Policymakers, reasoning
that unexpectedly lower rates or more diversified assets would restore these
institutions to health, chose to forbear and took actions to cover up emerging
problems in the industry. Regulatory forbearance often took the form of
capital augmentation, reductions in mandatory capital requirements, and
failure to enforce existing requirements.6 The government also allowed
thrifts to invest in nontraditional assets such as nonmortgage loans and

Perhaps themost amazingexampleofboth fraudandincompetenceisVernon
Savings and Loan of Vernon, Texas. By the time regulators closed Vernon in
1987, 96 percent of its loans were in default. Most of the remaining loans
contained some form of deferred interest provision; they could not possibly
have been in default because the first interest payments had not yet come due.
Scott Taylor, a former FSLIC deputy director of liquidations who saw more than
50 institutions placed into receivership, stated that "Those companies did not
fail because of broader asset and investment powers, or because of direct
investments in real estate. They failed because of fraud, incompetence and
criminality ...." See Benston (1985).
The wisdom of permitting insolvent institutions to continue to operate
has been challenged by Kane (1985, 1990), Kormendi et al. (1989), and Benston
and Kaufman (1990), among others. They argue that incentives to adopt risky
business and investment strategies are greatest for insolvent firms.
DeGennaro and Thomson (1990) estimate the cost of regulatory forbearance from
1980 through 1989. Although their preliminary evidence on the ex-post cost of
such forbearance is inconclusive, it does document the massive dollar amount
these regulatory gambles place at risk.

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equity. We include a partial listing of regulatory forbearances below.7
In November 1980, the FHLBB both reduced thrifts' explicit capital
requirement from approximately 5 percent to about 4 percent and provided for a
"qualifying balance deduction" that in effect lowered the requirement still
further. Beginning in November 1981, the FSLIC accepted net-worth
certificates from thrifts with less than 3 percent net worth in exchange for
FSLIC promissory notes, with face value guaranteed by the insurer. And
in a departure from generally accepted accounting principles (GAAP), the FSLIC
permitted thrifts to count these certificates as part of capital. In January
1982, the capital requirement was further reduced to 3 percent. The following
July, thrift regulators permitted goodwill (an intangible component of
capital) to be amortized over a 40-year period, while allowing income from
unbooked gains to be realized in as little as five years. Furthermore, the

FHLBB began to include "appraised equity capital" in its calculations of
regulatory net worth in November 1982.8
Beginning with DIDMCA in March 1980, legislative and regulatory
authorities began granting thrifts new investment powers. DIDMCA, for
example, authorized federally chartered S&Ls to invest up to 20 percent of
their assets in corporate bonds and consumer loans and extended their
authority to make construction or acquisition loans. The Garn-St Germain

For a more-detailed examination, see Barth and Bradley (1989) and Kane
(1989).
Appraised equity capital is the difference between the appraised market
value and the book value of certain assets.

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Depository Institutions Act of December 1982 expanded the limits on commercial
mortgage and consumer loans still further.
Even though interest rates had fallen substantially by 1985, the S&L
industry remained troubled.

In March 1985, the FHLBB issued new

regulations that limited the amount of direct investment thrifts could
undertake and reinstituted higher capital standards (Kane [1989, table 2-41).
Later that year, FHLBB Chairman Edwin Gray testified before Congress that both
regulations were needed to protect the FSLIC fund from ever-increasing credit
risks. However, these actions were motivated in large part by the FHLBB's
desire to maintain the S&L industry's "It's a Wonderful Life" image, thus
protecting its own regulatory turf and buying time to allow the industry to
recover. During the second half of the decade, the FHLBB continued its policy
of forbearance, but rather than augmenting capital through accounting
adjustments or reduced capital requirements, regulators simply ignored the
requirements after 1987.10
In brief, regulatory and legal action taken during the 1980s produced

Kane (1990) reports that the interest-rate decline was less helpful than
it might have appeared because many mortgage borrowers exercised their option
to refinance at the lower rates.
lo According to the GAO (1987, pp. 3 and 8), the FHLBB announced on February
25, 1987 that "...the Bank Board is unlikely to take administrative action to
enforce the minimum capital requirements for . . . basically sound, well-managed
thrifts with regulatory capital above 0.5 percent, and with problems in the
energy, agricultural, natural resources or other distressed sectors [of] the
economy." In large part, the change in the forbearance rationale was borne of
necessity. Barth and Bradley (1989) report that the FSLIC lacked the reserves
to close and resolve all of the insolvent thrift institutions.

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both lower capital requirements and increased investment powers, providing
thrifts with additional time to improve their business strategies and to
regain solvency. For example, regulators gave troubled thrifts the
opportunity to restructure their assets towards shorter-term commercial or
consumer loans, which in turn allowed these firms to reduce their risk and to
raise their asset quality. But the FHLBB also scaled back regulatory
supervision and left intact the risk-taking incentive structure for insured
thrifts. Given these perverse incentives, there could be no guarantee that
regulatory forbearance and new investment powers would be profitably utilized
rather than abused.

2.3 Testable Hypotheses
Our interest centers on whether the S&L industry did in fact seize
this opportunity to restructure itself. During the additional operating time
provided by regulatory forbearance, did thrift managers effectively utilize
their new powers?

If so, we hypothesize that recovered institutions may have

diversified their asset portfolios and restructured their liabilities in order
to achieve a more effective funding mix. However, less-frequent monitoring,
coupled with the perverse incentives inherent in flat-rate deposit insurance,
may have resulted in thrifts taking on more asset and liability risk. Our
empirical evidence suggests that successful institutions took on less risk
than those that failed, a finding that is consistent with Cole et al. (1990),
Benston (1985), Barth and Bradley (1989), Barth et al. (1990), and Kane
(1989).

Given this, we hypothesize that firms in financial distress at the

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beginning of a sample period might also have taken steps to reduce or to
manage risk by switching to a less-risky portfolio, changing their funding
mix, or increasing their capital to provide a cushion against losses.
Clearly, these options are not mutually exclusive.
Another strategy distressed thrifts could have employed is based on
the theoretical work of Merton (1977) and Marcus'(1984).

Modeling the equity

of an insured banking firm as a call option, these studies show that the
firm's equity value is a decreasing function of capital and an increasing
function of portfolio risk. Although this behavior is opposite that of the
observed risk-minimizing or risk-managing strategies noted above, it may be an
optimal strategy for undercapitalized firms. In fact, deterioration of the
credit quality of thrift portfolios during the second half of the 1980s is
likely a consequence of this restructuring strategy.
Our null and alternative hypotheses are as follows:
HO:

Recovered thrifts pursued a different
restructuring strategy than nonrecovered
thrifts.

H1:

Recovered thrifts pursued the same risky
restructuring strategy as nonrecovered
thrifts, but were luckier.

We also ask whether managers of failing firms consumed more perks. If not,
then perhaps self-dealing by management was not a material factor in the
industry's demise.

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3. Data and Sample Selection

We obtained data from the FHLBB Thrift Financial Reports (call
reports).

These reports, which the FHLBB uses in off-site examinations,

contain financial information on balance-sheet and income-statement items, as
well as on items such as regulatory capital and rates paid on accounts. The
data pertain to FSLIC-insured S&Ls and mutual savings banks.
Our sample period begins December 31, 1979 and extends through
December 31, 1989. Because the FHLBB required thrifts to file these reports
semiannually through December 31, 1983 and quarterly thereafter, our sample
covers 33 call reports. To permit meaningful comparisons through time, we
semiannualize the data beginning in 1984, resulting in 21 semiannual
observations.
We chose December 31, 1979 as our starting date for several reasons.
First, 998 thrifts were unable to meet capital requirements at that time.
Second, the date precedes the 1980 and 1982 legislative changes and the
explicit adoption of forbearance policies by thrift regulators. Third, it
provides a full 10-year period to track the progress of thrifts in financial
difficulty. Finally, December 31, 1979 marks the transition date from one
call report format to another. As one might expect, specific data items
included in these reports evolve through time, with substantial changes
introduced periodically. By beginning our sample immediately after such a
change, we minimize the number of variables lost. In a few cases, we are able
to reconstruct variables by combining others according to information
contained in the Microdata Reference Manual (see Board of Governors of the

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Federal Reserve System [1989]).

Because we wanted to focus on the most

important thrifts, we selected the 300 largest firms having GAAP net
worth/total asset ratios of less than 5 percent at the end of 1979.''
Table 1 gives the time profile of the sample. Firms may disappear
from the sample for any of several reasons. First, they may have failed and
been closed by regulatory authorities. Second, regulators may have forced
them to merge with other institutions. Finally, they may have been acquired
by other firms without federal intervention. Barth et al. (1990) claim that
most thrift failures prior to 1983 resulted from unexpected interest-rate
increases. They further argue that 1983 and 1984 were characterized by
relatively few failures and that most thrifts failing after 1985 did so
because of poor asset quality. The relative paucity of failed thrifts in the
mid-1980s is somewhat misleading, because the number of surviving firms in our
sample declines in each period. This drop-off makes the large number of
failures from January 1988 through 1989 still more substantial, as it reflects
more than 23 percent of the total number of firms in the sample at the
beginning of 1988.

4. Empirical Evidence and Discussion
The appropriate measure of thrift net worth depends on the intended
use of the information. When available, market-based measures are preferred,
but because relatively few thrifts in our sample have publicly traded equity,
* * * * * * A * * * * *

The 5 percent selection criterion approximates the statutory capital
requirement in force in December 1979.

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we are limited to using financial data. Three measures using historical cost
are most commonly employed. First, net worth may be computed according to
GAAP net worth, This measure is useful for standard auditing purposes.
Second, tangible net worth can be derived by subtracting goodwill from GAAP.
This measure is often used as an estimate of liquidation value, since goodwill
is lost in liquidation. Third, RAP net worth, which is useful for judging
whether thrifts are in conformity with regulatory standards, can be derived by
adding GAAP net worth to various items designed to augment thrifts' apparent
capital positions. Examples include net-worth certificates, appraised equity
capital, income-capital certificates, accrued net-worth certificates,
qualifying subordinated debentures, and qualifying mutual-capital
certificates. From these three cost measures, we have selected GAAP net worth
for this analysis because it best represents a firm's going-concern value.
The exact construction of GAAP net worth from call report data is discussed in
the appendix.
To ensure that thrifts were correctly classified in the sample, we
matched all firms not filing a complete series of call reports over the sample
period against the merger history file and the list of thrift failures
published by the Office of Thrift Supewision. Using these two files, we were
able to classify all but 10 institutions as failed or merged over the sample
period. We then hand-checked these 10 against various issues of
Savings Institution Directory (published by Rand McNally) and were able to
classify seven as either mergers or failures. The remaining three thrifts
(two of which recovered) were found to be in existence, but were reporting

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call data under a different docket number than in 1979.12
Of the 300 thrifts in our sample, failing firms that were closed by
regulators account for 25 percent, institutions merged (with or without
federal assistance) account for 30 percent, and surviving thrifts account for
32 percent.

Thus, recovered thrifts represent only 13 percent of the total

sample. These firms were not only in existence in December 1989, but had
rebuilt their average capital-to-assetratios to 5 percent or more. Because
the patterns of most variables for failing, merged, and surviving thrifts are
similar, we combine these three groups to form the nonrecovered sample.
By including merged thrifts in the nonrecovered sample, we implicitly
assume that they would not have survived had they remained independent.
Ideally, the merged thrifts should be separated into two types: private
mergers (which may include firms that would have survived) and supervisory
mergers (which should be treated as failures).

Unfortunately, with the

exception of assisted mergers (classified here as failures), we cannot
distinguish private mergers from unassisted supervisory mergers. Thus,
including merged firms in the nonrecovered sample may bias us against finding
differences between the recovered and nonrecovered samples.
To check the sensitivity of our merged-sample results, we reran the
tests after excluding thrifts that disappeared because of a merger.

Overall,

we found that the results are not sensitive to inclusion of the merged thrifts

************
l2 We extend special thanks to Michael Bradley and the Office of Thrift
Supervision for providing us with the merger history file and the list of
thrift failures through the end of 1989.

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in the nonrecovered sample. This suggests that the majority of thrifts in the
merged sample entered into merger agreements (either voluntarily or under
supervisory pressure) because their prospects for recovery, and even survival,
would have been dim had they remained independent,
Before presenting our empirical results, a discussion of our sample
sizes is in order. Although 261 firms failed to recover, we include only 255
in the first portion of our sample (December 1979 to June 1985) when reporting
comparisons through time. This is because six firms failed between December
1979 and June 1980, leaving us with only one observation for each. We treat
the second subperiod (June 1985 through December 1989) in a similar manner.
Although 160 of the nonrecovered firms were in existence in June 1985, we
include only 158 because two failed before December 1985. For comparisons
between groups (recovered versus nonrecovered), the sample sizes depend on the
particular semiannual period examined, since some thrifts failed in each.
We split the sample period in June 1985 because in March of that year
the FHLBB issued new regulations restricting S&L growth and investment
powers - - a policy change that certainly affected thrift behavior in the
second half of the decade.

In addition, the critical restructuring decisions

that ultimately determined whether a thrift recovered, survived, or failed
were likely to have been made in the early 1980s. Therefore, simply comparing
thrifts included in the sample at the beginning with those in existence at the
end could be misleading.
Table 2 reports average total assets and GAAP net-worth ratios for
both subperiods. One striking feature is that although recovered firms were,

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on average, initially larger than nonrecovered firms, they generally grew more
slowly. During the first subsample, which is characterized by increased
investment powers, total assets of successful thrifts grew an average of 28.3
percent annually, compared to 37.4 percent for unsuccessful thrifts. During
the second subperiod, this trend reversed. Recovered thrifts grew 7.6 percent
annually, while nonrecovered thrifts grew only 4.0 percent.
Kaufman (1989) reports that the S&L industry expanded faster than the
commercial banking industry between 1980 and 1987, a finding that is
consistent with the high growth rate we observe for our total sample. But
this pattern runs counter to that of most industries, which typically shrink
during times of financial stress. Levy et al. (1988) cite excessive growth as
an important factor in thrift failure, suggesting that the 37.4 percent growth
rate of nonrecovered firms in our first subsample may have played a
significant role in these institutions' demise.
The differences in the average GAAP net worth to total asset ratios
are impossible to ignore. Initially, both recovered and nonrecovered firms
had similar capital levels (as well as similar retained earnings and paid-in
surplus).

However, in both subsamples, nonrecovered thrifts experienced

continuous earnings problems that eroded their retained earnings and net
worth.

In contrast, successful thrifts had higher earnings in both periods

(especially the second), and their net-worth ratios were boosted by
substantially larger capital infusions, reflected in paid-in surplus.
As shown in table 3, we find no evidence that the asset structures of
recovered and nonrecovered thrifts differed significantly in December 1979.

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This is not surprising given the role of the industry at that time.
Traditionally, thrifts made mortgage loans that matured in 30 years.

But in

the early 1980s, legislation was adopted that allowed these institutions to
make commercial and consumer loans as well as traditional mortgage loans.
Both commercial and consumer loans typically mature much quicker than
traditional mortgages and afford thrifts the opportunity to spread their
assets among a wider range of investments. Given these new powers, one would
expect to find a shift in asset structure from traditional mortgage loans to
nonmortgage investments.
Table 3 shows that this expected shift was under way by the mid-1980s.
Importantly, the asset structure of nonrecovered firms diverged from that of
recovered thrifts over time, with nonrecovered thrifts holding more risky
assets. Holdings of nonresidential loans, land loans, service corporation
investments, and junk bonds by nonrecovered thrifts were significantly higher
than for their successful counterparts, while holdings of other assets
(mortgage, commercial, and consumer loans) did not differ significantly across
groups.l3 By June 1985, the single-family mortgage investments of both
types of thrifts had been significantly reduced, whereas investment in
commercial loans, consumer loans, and mortgage-backed securities had risen.
However, the increase in commercial and consumer loans for successful firms
was not statistically significant.
In the second subsample, the proportion of total assets in

************
l3
For evidence that these activities are riskier than traditional mortgage
lending, see Brewer (1990).

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single-family mortgages continued to decline, as both groups of thrifts
invested more heavily in mortgage-backed securities; however, no other
substantial investment changes were evident over time. This does not mean
that thrifts collectively opted to hold safer portfolios.

In fact, the drift

toward riskier investments continued: Nonrecovered institutions held more
junk bonds and invested more in service corporations in December 1989 than in
June 1985. Importantly, the unsuccessful firms' riskier portfolios did not
yield significantly more total income than the safer portfolios of the
recovered firms.
Table 4 shows that the liability structures of both recovered and
nonrecovered thrifts were largely the same in December 1979. Foreclosed
assets for nonrecovered thrifts were statistically larger than for recovered
thrifts. However, the difference is not important economically.
Increases in FHLBB advances in the mid-1980s are significant both
statistically and economically for nonrecovered thrifts, signaling the
deteriorating financial condition of these firms. However, this finding also
indicates that nonrecovered thrifts were utilizing an important government
subsidy. Firms that are members of the Federal Home Loan Bank (FHLB) system
are afforded the privilege of borrowing from their district FHLB. These
borrowings provide liquidity and a subsidized source of funds.
During the first subsample, recovered thrifts shifted from higher-risk
wholesale deposits to retail deposits more than did failed thrifts. In June
1985, retail deposits of recovered firms accounted for 75 percent of total
assets, while for nonrecovered firms the corresponding figure was only 54

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percent, Successful firms' reorientation toward a retail focus is also
reflected in their diminishing reliance on brokered deposits. Although the
flow of brokered deposits to successful firms had grown slightly by the
mid-1980s, it had increased substantially for nonrecovered thrifts.14
Clearly, recovered firms used the funding flexibility afforded
depository institutions by DIDMCA and the Garn-St Germain Act (1982) more
successfully than nonrecovered thrifts. The difference in the two groups'
funding strategies reflected on their 1985 balance sheets suggests that while
both types of institutions grew during the first half of the decade, the
recovered thrifts pursued more conservative growth strategies than their
unsuccessful counterparts. Recovered thrifts pursued a core-deposit growth
strategy by expanding their assets at a rate they could primarily fund with
inexpensive retail deposits. Therefore, the asset growth of recovered thrifts
is consistent with the natural market growth associated with successful firms.
Nonrecovered firms' continued reliance on large, interest-sensitive
wholesale deposits and nondeposit liabilities indicates a more speculative
pattern of growth. Although these institutions used the new funding
flexibility to increase their retail deposits, they expanded their asset
portfolios even faster. This suggests that nonrecovered thrifts pursued a
speculative growth strategy, since it is likely that the retail-deposit growth

l4
Brokered deposits are similar to wholesale deposits in that they are
raised in regional and national money markets and thus tend to be a volatile
and interest-sensitive source of funds. Unlike wholesale deposits, which
thrifts raise directly, brokered deposits are placed in thrifts by a money
broker, who divides the deposits into pieces small enough to be fully insured.

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rate is closely linked to the growth rate of income, which in turn is linked
to the growth rate of the economy.
The FHLBB attempted to stop the flow of brokered deposits during the
second portion of our sample, a policy that Kaufman (1989) claims was a
mistake.

Because insolvent institutions pursuing high-risk strategies must

pay higher rates to attract deposits, the FHLBB, he argues, could have used
the rates thrifts were willing to pay for these deposits as a guide for
identifying troubled institutions. Our evidence supports Kaufman's
contention, especially during the second subperiod. Thrifts in the
nonrecovered sample held nearly five times as many brokered deposits per
dollar of assets as the recovered thrifts over this period, and their reliance
on brokered deposits more than doubled.
The differences between the second and third columns of table 4
are worth noting for nonrecovered thrifts. The second column includes 255
firms: 103 that failed or merged prior to June 1985 (less six that
failed/merged before June 1980), 62 that failed/merged between June 1985 and
December 1989, and 96 that continued to operate but had not rebuilt their
capital ratios to 5 percent of total assets. The third column includes only
156 firms: the 62 that failed/merged between June 1985 and December 1989
(less two that disappeared before December 1985) and the 96 that survived but
did not recover. In brief, the third column contains a lower proportion of
exceedingly weak firms. During the sample period, thrift regulators
incorporated funding mix and asset composition into their closure rules.
Nonrecovered thrifts whose restructuring strategies differed most from the

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successful samples were more likely to be shut down by thrift regulators.
Therefore, it is reasonable for this column to more nearly approximate the
values of the 39 successful thrifts. This is indeed the case. For example,
retail deposits for nonrecovered thrifts are only 53.5 percent of total assets
in column 2, while in column 3, that figure rises to 72.4 percent

quite

close to the 74.7 percent figure obtained for recovered thrifts.15
Interestingly, while nonrecovered thrifts spent more for advertising
than recovered firms during the first sample period, the opposite was true
during the second period. The difference is not statistically significant,
however .
Benston (1985), among others, reports that fraud is often an important
determinant of thrift failure. Although we cannot measure fraud directly with
our data, we are able to study a related factor: perquisite consumption.
Table 5 includes three proxies for perk consumption - - directors' fees, office
expenses, and travel expenses

and reports that no significant differences

occurred across recovered and nonrecovered firms. Although fraud may well
have been important in i n d i v i d u a l thrift failures, our evidence lends little
support to the hypothesis that overconsumption of perks was an important
factor in the industry's demise.

Instead, failed thrifts' poor performance

may have been due to bad business judgment, bad luck, or both.

l5
Thomson (1987a) finds that the value of forbearance embedded in thrifts'
stock-market values is a function of the funding mix and the diversification
of the asset portfolio.

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Sensitivity Tests
To investigate the robustness of the univariate analysis presented in

tables 2 to 5, we perform discriminant analysis to select variables that
distinguish recovered from nonrecovered thrifts in December 1979, June 1985,
and December 1989. Similar results are obtained.
As is typically the case in economics and finance studies, the
hypothesis tests presented here represent tests of joint hypotheses.

That is,

our univariate tests are really an examination of 1) the null hypothesis that
capital-deficient thrifts which recovered pursued a different operating
strategy during the 1980s than those which did not and 2) the maintained
hypothesis that both groups of thrifts were essentially the same in December
1979. Without testing the maintained hypothesis, our univariate tests cannot
accept the null hypothesis; they can only fail to accept the alternative
hypothesis.
To test this ancillary hypothesis, we performed a number of logit
regression experiments to determine whether we could statistically
discriminate between the two samples in December 1979. Variables for these
regressions were chosen in three different ways.

First, we constructed

variables shown to be significant predictors of thrift failure. Second, we
used stepwise discriminant analysis to select regressors from the variables
used in this study and in Cole et al. (1991) .I6 Finally, we employed factor

************
l6
We performed stepwise discriminant analysis using stepwise, forward, and
backward elimination. Stepwise and forward selection indicated one logit
footnote continues next page

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analysis to construct factor loadings from the combined set of variables used
here and in Cole et al. Logit analysis was then performed using these factor
loadings as regressors.
Regardless of the model specification, logit analysis was unable to
discriminate between successful and unsuccessful thrifts, indicating a
significant group overlap between the two samples. Thus, we cannot reject the
maintained hypothesis that the capital-deficient thrift samples were
relatively homogeneous in 1979.
Our inability to statistically distinguish between recovered and
nonrecovered thrifts at the beginning of the sample period calls into question
the wisdom of capital forbearance polices.

It is doubtful that policymakers

could have predicted which thrifts would use their additional time and powers
to recover and which would optimally choose to maximize the value of their
deposit guarantees by pursuing high-risk strategies. This implies that the
adoption of capital forbearance policies in the early 1980s was at best a
long-shot bet that exposed taxpayers to enormous financial risk.

continued footnote
regression specification, while backward elimination suggested another.
However, neither specification proved capable of discriminating between
successful and unsuccessful thrifts in December 1979.

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6. Conclusion
Unexpected increases in interest rates during the early 1980s and
decreases in asset quality in the late 1980s caused massive losses throughout
the S&L industry.

Insolvency was common, if not the rule. But because of

bureaucratic forbearance, funding constraints, and federal deposit insurance,
hundreds of insolvent thrifts continued to operate. These factors, coupled
with the expanded investment and lending powers granted to the industry in the
early 1980s, gave thrift managers the opportunity to restructure their firms
and to regain profitability and solvency.
The model in Buser et al. (1981) suggests that the combination of
expanded powers, flat-rate deposit insurance, and lower capital requirements
implied the need for more effective monitoring. But in fact, the number of
examiners was reduced as the potential for abuse was increased. Furthermore,
regulators left intact the incentives for thrifts to take risks. As a result,
it is not surprising that the condition of the industry does not appear to
have improved.
Most thrifts in our sample shifted away from traditional mortgage
assets between December 1979 and December 1989. Only 13 percent of the
300 thrifts studied both survived and rebuilt their capital ratios to the 5
percent regulatory minimum in effect at the beginning of the sample period.
We found that these thrifts held less-risky portfolios than their unsuccessful
counterparts. Overall, our empirical tests support the null hypothesis that
the successful thrifts pursued a different restructuring strategy than those

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that failed.
Finally, because there was little difference between the initial asset
and liability structures of thrifts that were ultimately successful and those
that were not, it is unlikely that regulators would have been able to predict
in December 1979 which of the firms in our sample would eventually recover.

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Appendix
Perhaps surprisingly, GAAP net worth is generally not reported in the
call reports.

Because the data are collected for regulatory purposes, RAP

values are used instead. We are able to compute GAAP net worth for the years
in which data are unavailable, however, by using the following procedures:

Prior to June 30, 1981: "Total net worth" minus deferred
losses on securities sold and accounts receivable secured by
pledged savings.
For December 31, 1981: "Total net worth" minus qualifying mutual-capital certificates minus deferred losses on
securities sold and accounts receivable secured by pledged
savings.
For June 30, 1982: Same as for December 31, 1981, although
the call report variable number for qualifying mutual-capital
certificates is different.
For 1983: RAP net worth minus the sum of qualifying mutualcapital, income-capital, and net-worth certificates, qualifying
subordinated debentures, appraised equity capital, deferred
losses on loans sold, and accounts receivable secured by pledged
savings .
For March 31, 1984 to December 31, 1986: The sum of preferred
stock, permanent reserve or common stock, capital contributions,
and undivided profits, less the sum of deferred net losses
(gains) on loans sold, deferred net losses (gains) on other
assets sold, and accounts receivable secured by pledged savings,
plus the sum of reserves for contingencies and other capital
reserves, plus net retained earnings.
For March 31, 1987 through December 31, 1988: Perpetual
preferred stock plus the sum of permanent reserve or
common stock, capital contributions, and undivided profits,
less the sum of deferred net losses (gains) on loans sold,
deferred net losses (gains) on other assets sold, and accounts
receivable secured by pledged savings.
For 1989: GAAP net worth is reported directly on the
call reports.

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References
Barth, James R., Philip F. Bartholomew, and Michael G. Bradley, "Determinants
of Thrift Institution Resolution Costs," Journal of Finance, vol. 45, no. 3
(July 1990), pp. 731-54.
Barth, James R., and Michael G. Bradley, "Thrift Deregulation and Federal
Deposit Insurance," Journal of Financial Services Research, vol. 2, no. 3
(August 1989), pp. 231-59.
Benston, George J., An Analysis of the Causes of Savings and Loan Association
Failures. New York: Salomon Brothers, 1985.

, and George G. Kaufman, "The Savings and Loan Debacle: Causes
and Cures," The Public Interest 99, Spring 1990, pp. 79-95.
Board of Governors of the Federal Reserve System, Microdata Reference Manual,
vol. 3. Washington, D.C.: Board of Governors, June 1989.
Bradley, Michael G., R. Dan Brumbaugh, Jr., Daniel Sauerhaft, and George H.K.
Wang, "Thrift-InstitutionFailures: Estimating the Regulator's Closure
Rule," in George C. Kaufman, ed., Research in Financial Services 1.
Greenwich, Conn.: JAI Press, 1989.
Brewer, Elijah, "The Impact of Deposit Insurance on S&L Shareholders:
Risk-Return Tradeoffs," Federal Reserve Bank of Chicago, Working Paper,
December 1990.
Buser, Stephen A., Andrew H. Chen, and Edward J. Kane, "Federal Deposit
Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of
Finance, vol. 36 (March 1981), pp. 51-60.
Cole, Rebel, Joseph A. McKensie, and Larry White, "Deregulation Gone Awry:
Moral Hazard in the Savings and Loan Industry," New York University,
Working Paper, 1991.
DeGennaro, Ramon P., and James B. Thomson, "Capital Forbearance and Thrifts:
An Ex Post Examination of Regulatory Gambling," unpublished manuscript,
1990.
Ely, Bert, Testimony, Resolution Trust Corporation Task Force of the
Subcommittee on Financial Institutions, Regulation, and Insurance,
Committee on Banking, Finance, and Urban Affairs, U.S. Congress, House of
Representatives, October 19, 1989.
Emerson, G, "Guaranty of Deposits under the Banking Act of 1934," Quarterly
Journal of Economics, vol. 48 (1934), pp. 229-44.

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Federal Home Loan Bank Board, Purchasing an Insolvent Savings Institution
through the Federal Savings and Loan ~nsuranceCorporation. Washington,
D.C.: Federal Home Loan Bank Board, 1988.
Flannery, Mark J., "Pricing Deposit Insurance When the Insurer Measures with
Error," Journal of Banking and Finance, vol. 15 (September 1991), pp.
975-98.
General Accounting Office, Thrift Industry Forbearance for Troubled
Institutions, 1982-1986. Washington, D.C.: GAO, May 1987.
Gilson, Stuart, Kose John, and Larry H.P. Lang, "Troubled Debt Restructurings:
An Empirical Study of Private Reorganization of Firms in Default," Journal
of Financial Economics, vol. 27 (1991), pp. 315-54.
John, Kose, Theresa John, and Lemma Senbet, "Risk-Shifting Incentives of
Depository Institutions: A New Perspective on FDIC Reform," Journal of
Banking and Finance, vol. 15 (September 1991), pp. 975-98.
Kane, Edward J., The Gathering Crisis in Federal Deposit Insurance.
Cambridge, Mass.: MIT Press, 1985.

, The S&L Insurance Mess:
The Urban Institute, 1989.

How Did It Happen? Washington, D.C.:

, "Principal-AgentProblems in S&L Salvage," Journal of Finance,
vol. 45, no. 3 (July 1990), pp. 755-64.
Kaufman, George G., "Comments on 'Thrift Deregulation and Federal Deposit
Insurance' by James R. Barth and Michael G. Bradley," Journal of Financial
Services Research, vol. 2, no. 3 (September 1989), pp. 261-64.
Keeley, Michael, "Deposit Insurance, Risk, and Market Power in Banking,"
American Economic Review, vol. 80, no. 5 (December 1990), pp. 1183-1200.
Kormendi, Roger C., Victor L. Bernard, S. Craig Pirrong, and Edward A. Snyder,
Crisis Resolution in the Thrift Industry. A Mid America Institute Report.
Boston: Kluwer Academic Publishers, 1989.
Levy, Gerald J., Herbert M. Sandler, and Donald B. Shackelford, "Statement
before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate,"
August 2, 1988.
Marcus, Alan J., "Deregulation and Bank Financial Policy," Journal of Banking
and Finance, vol. 8 (December 1984), pp. 557-65.
Merton, Robert C., "An Analytic Derivation of the Cost of Deposit Insurance
and Loan Guarantees: An Application of Modern Option Pricing Theory,"
Journal of Banking and Finance, vol. 1 (June 1977), pp. 3-11.

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Pauley, Barbara, The Thrift Reform Program:
York: Salomon Brothers, April 1989.

Summary and Implications. New

Ritchken, Peter, James B. Thomson, Ramon P. DeGennaro, and Anlong Li, "On
Flexibility, Capital Structure and Investment Decisions for the Insured
Bank," Federal Reserve Bank of Cleveland, Working Paper 9110, July 1991.
Ronn, Ehud I., and Avinash K. Verma, "Pricing Risk-Adjusted Deposit Insurance:
An Option-Based Model," Journal of Finance, vol. 41 (September 1986),
pp. 871-95.
Thomson, James B., "FSLIC Forbearances to Stockholders and the Value of
Savings and Loan Shares," Federal Reserve Bank of Cleveland, Economic
Review (1987a Quarter 3), pp. 26-35.

, "The Use of Market Information in Pricing Deposit Insurance,"
Journal of Money, Credit and Banking, vol. 19 (November 1987b), pp: 528-37.

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Table 1:

Time profile of the sample

Failures and mergers of the 300 largest FSLIC-insured S&Ls and
mutual savings banks with capital ratios of less than 5 percent on
December 31, 1979. Sample period is December 31, 1979 to December
31, 1989. Data are taken from the FHLBB call reports.
Nunber of Fai Lures/Mergers

Source: Authors.

Remaining Fims

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Table 2:

Summary statistics of asset and net-worth structure

Layout of the data is as follows:
First subsample:
Data in the column headed 12/1979 pertain to
those firms surviving on December 1979. Data in the column headed
6/1985 are the latest data available through June 1985 for those
firms. Sample sizes are 39 for the recovered firms and 255 and for
the nonrecovered firms.
Second subsample:
Data in the column headed 6/1985 pertain to
those firms surviving on June 1985. Data in the column headed
12/1989 are the latest data available through December 1989 for
those firms. Sample sizes are 39 for the recovered firms and 156
for the nonrecovered firms.
F i r s t subsample

Total Assets
Annual Growth
Recovered
Thrifts

GAAP Net Worth
Retain Earning
Paid-insurplus
Total Asset
Annual Growth

Nonrecovered
Thrifts

GAAP Net Worth
Retain Earning
Paid-insurplus

643.787
0.044
0.013
0.000

1175.931#
0.283
0.034
0.007#
0.015#

Second sobsanple

1175.931
0.283

1585.860
0.07W

0.034
0.007
0.015

0.067##
0.035##
0.03W
1966.014
0.04W

542.490

1173.702##
0.374

1554.864
0.528**

0.041
0.010
0.001

O . O W *
-.002##**
0.005##**

O.OOP*
0.002**
0.006**

- .033##**
- .042##**

0.014##**

## or **: Significant a t the 1 percent level.
# or *: Significant a t the 5 percent level.
# and ## measure the significance level of the difference between variables a t the end versus
the beginning of the subperiods.
and ** measure the significance level of the difference between variables across recovered
t h r i f t s and non~recoveredt h r i f t s i n s given pcriod.
Source: Authors.

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Table 3:

Mortgage and nomortgage investment

Includes t h e 300 l a r g e s t t h r i f t s with GAAP n e t worth/total a s s e t
Recovered t h r i f t s a r e
r a t i o s of less than 5 percent i n 1979.
defined a s those t h a t survive t h e e n t i r e sample period (December
31, 1979 through December 31, 1989) and have GAAP n e t worth/total
a s s e t r a t i o s i n excess of 5 percent i n 1989. Nonrecovered t h r i f t s
a r e defined a s those t h a t e i t h e r do not survive t h e e n t i r e sample
period o r have GAAP n e t worth/total a s s e t r a t i o s of less than 5
percent i n 1989. The d a t a a r e taken from t h e FHLBB c a l l r e p o r t s .
A l l numbers a r e reported by f i r s t subsample (December 1979 t o June
1985) and second subsample (June 1985 t o December 1989).
All
v a r i a b l e s except t o t a l a s s e t s and growth r a t e s a r e scaled by t o t a l
a s s e t s . I f a v a r i a b l e is not reported on t h e c a l l r e p o r t s o r cannot
be constructed f o r a given period, t h a t i t e m is denoted by

Layout of t h e data is a s follows:

First subsample:
Data i n t h e column headed 12/1979 p e r t a i n t o
those firms surviving on December 1979. Data i n t h e column headed
6/1985 a r e t h e l a t e s t d a t a a v a i l a b l e through June 1985 f o r those
firms. Sample s i z e s a r e 39 f o r t h e recovered firms and 255 and f o r
t h e nonrecovered firms.
Second subsample:
Data i n t h e column headed 6/1985 p e r t a i n t o
those firms surviving on June 1985.
Data i n t h e column headed
12/1989 a r e t h e l a t e s t d a t a a v a i l a b l e through December 1989 f o r
those firms. Sample s i z e s a r e 39 f o r t h e recovered firms and 156
f o r t h e nonrecovered firms.
F i r s t subsample

Mortgage Loans
Single Family
~ u l t i p l eFamily
Nonresidential
Land Loans
Mortgage-Backed
Securities
Recovered
Thrifts

Wonmortgage Loans
~omne;cial Loans
C o n s w r Loans

0.675
0.058
0.067
0.007
0.038

0.490##
0.064
0.067
0.010
0.116##

0.490
0.064
0.067
0.010
0.116

0.470
0.061
0.067
0.015
0.143

0.004
0.025

0.017
0.033

0.013
0.048

0.002
0.010#
0.000

0.002.
0.010
0.000

0.002
0.011
0.000

Other Risky Investments
Real Estate
0.002
Service Corp.
0.005
Junk Bonds

WonRecovered
Thrifts

Second subsanple

Total Income

0.045

0.054##

0.054

0.050##

Mortgage Loans
Single Family
Multiple Family
Nonresidential
Land Loans
Mortgage-Backed
Securities

0.659
0.055
0.073
0.008
0.051

0.512##
0.056
0.089W
0.021W*
0.107##

0.466
0.060
0.098*
0.028**
0.102

0.417##
0.056
0.100"
0.019#
0.149##

Wonmortgage Loans

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Comnercial Loans
Consuner Loans

0.007
0.026

0.013##
0.034##

0.014
0.042

0.018
0.047

Other Risky Investments
Real Estate
0.001
Service Corp
0.005
Junk Bonds

0.00W
0.014##
0.003**

0.004
0.017.
0.003"

0.004
0.020'
0.005**

Total Income

0.054##

0.056

0 . W

0.045

## or **: Significant a t the 1 percent Level.
# o r *: Significant a t the 5 percent level.
# and ## measure the significance Level of the difference between variables a t the end versus
the beginning o f the subperiods.
* and ** measure the significance Level of the difference between variables across recovered
t h r i f t s and nonrecovered t h r i f t s i n a given period.
Source: Authors.

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Table 4:

Liabilities, bad loans, and advertisement expenses

I n c l u d e s t h e 300 l a r g e s t t h r i f t s w i t h GAAP n e t w o r t h / t o t a l a s s e t
r a t i o s of less t h a n 5 p e r c e n t i n 1979.
Recovered t h r i f t s a r e
d e f i n e d a s t h o s e t h a t s u r v i v e t h e e n t i r e sample p e r i o d (December
31, 1979 t h r o u g h December 31, 1989) and have GAAP n e t w o r t h / t o t a l
a s s e t r a t i o s i n e x c e s s of 5 p e r c e n t i n 1989. Nonrecovered t h r i f t s
a r e d e f i n e d a s t h o s e t h a t e i t h e r do n o t s u r v i v e t h e e n t i r e sample
p e r i o d o r have GAAP n e t w o r t h / t o t a l a s s e t r a t i o s of less t h a n 5
p e r c e n t i n 1989. The d a t a a r e t a k e n from t h e FHLBB c a l l r e p o r t s .
A l l numbers a r e r e p o r t e d by f i r s t subsample (December 1979 t o J u n e
All
1985) and second subsample (June 1985 t o December 1989).
v a r i a b l e s e x c e p t t o t a l a s s e t s and growth r a t e s a r e s c a l e d by t o t a l
a s s e t s . I f a v a r i a b l e is n o t r e p o r t e d on t h e c a l l r e p o r t s o r c a n n o t
be c o n s t r u c t e d f o r a g i v e n p e r i o d , t h a t i t e m is d e n o t e d by

Layout of t h e d a t a is as f o l l o w s :

First subsample:
Data i n t h e column headed 12/1979 p e r t a i n t o
t h o s e f i r m s s u r v i v i n g on December 1979. Data i n t h e column headed
6/1985 a r e t h e l a t e s t data a v a i l a b l e through J u n e 1985 f o r t h o s e
f i r m s . Sample s i z e s a r e 39 f o r t h e r e c o v e r e d f i r m s and 2 5 5 and f o r
t h e nonrecovered f i r m s .
Second subsample:
D a t a i n t h e column headed 6/1985 p e r t a i n t o
t h o s e f i r m s s u r v i v i n g on J u n e 1985.
Data i n t h e column headed
12/1989 are t h e l a t e s t data a v a i l a b l e through December 1989 f o r
t h o s e firms. Sample s i z e s a r e 39 f o r t h e r e c o v e r e d firms and 156
for t h e nonrecovered firms.
Firstsubsanple

Recovered
Thrifts

Deposit Structure
R e t a i l Deposits
Uholesale Deposits
Brokered Deposits
FHLBB Advances

0.218
0.583
0.001
0.084

0.747##
0.064##
0.004
0.05W

0.747
0.064
0.004
0.059

0.720
0.076
0.008
0.067

Bad Loans
Slow Loans
Foreclosed Assets

0.009
0.000

0.015##
0.005##

0.015
0.005

0.027#
0.010

0.00063

0.00039##

0.00039

0.00043

Full text of Working Paper (Federal Reserve Bank of Cleveland) : Troubled Savings and Loan Institutions : Voluntary Restructuring Under Insolvency, Working Paper 91-12

FRASER