The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
orKing raper series Lending to troubled thrifts: the case of F H L B a n k s L is a K . A s h l e y a n d E lija h B r e w e r i l l Working Papers Series Research Department Federal Reserve Bank of Chicago December 1998 (W P -98-22) l l B a a B H ia;ii ; i i i i j i ii ■ 111 1111llllll111111.lllll1111' 11 11111llllll:11111I .llll111; llllll11111:l lll1111. 1 FEDERAL RESERVE B A N K OF CHICAGO L e n d in g to t r o u b le d t h r if t s : th e c a s e o f F H L B a n k s * by Lisa K . A s h l e y Elijah B r e w e r III R e s e a rc h D e p a rtm e n t, 1 1 th F lo o r 2 3 0 S . L a S a lle S tre e t F e d e r a l R e s e rv e B a n k o f C h ic a g o C h ic a g o , I llin o is 6 0 6 0 4 -1 4 1 3 [Please Do not Quote without permission from Authors] December 1998 ‘ e thank James R. Barth, Philip Bartholomew, George G. Kaufman, Helen O ’ Koshy, and W D. David Marshall for valuable comments and suggestions. The research assistance of Susan Yuska i greatly appreciated. The views expressed here are s r c l those of the authors and do not s tity necessarily represent the position of the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Chicago. Introduction The failure rate for t r f s in the second halfof the 1980s and early 1990s was hit substantially higher than in earlier decades.1 For example, the number of t r f failures averaged hit about 32 per year between 1980 and 1985, compared with about 136 per year between 1986 and 1992.2 The Federal Home Loan Bank (FHLBank) System was die primary federal regulator of t r f s and was responsible for the supervision and examination of most ofthese failing hit i s i u i n . The FHLBank System also lent funds to t r f s i became a reliable source of ntttos hit; t nondeposit funds to support the lending a t vities of safe and sound i s i u i n . According to ci ntttos Bodfish and Theobald (1938) and as discussed in Barth and Regalia (1988), the FHLBank System lending program was not intended to “bail out” failing t r f s Yet, many failed t r f s hit. hit borrowed from the FHLBank System during the 1980s, and some borrowed a substantial amount several years prior to their closure. For example, ofthe 205 t r f s that were resolved (that i , hit s liquidated or merged with regulatory assistance) in 1988, the year before Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), 76 percent borrowed from their FHLBank three years before closure with borrowings, in some cases, as high as 35 percent oft t l assets. In their l s year of operation, some of these t r f s financed about 72 oa at hit percent of theirtotal assets with FHLBank loans. By contrast, only 40 percent of their solvent counterparts borrowed from FHLBanks at the end of 1988, financing, in some cases, only 46 percent of t t l assets. oa At the time of their closure, the estimated present-value cost to the now defunct Federal Savings and Loan Insurance Corporation (FSLIC) to resolve the 205 t r f s exceeded $32 b l i n hit ilo, suggesting that these institutions were in serious financial trouble. Because of their poor financial 1 condition, some of these t r f s could not provide adequate collateral (that i , eligible assets) to hit s secure their FHLBank loans.3The FSLIC issued guarantees for some of the more poorly capitalized t r f sto secure the funds lent by FHLBanks (see Garcia and Plautz, 1988).4The hit question then arises whether FHLBank lending to financially distressed t r f s increased FSLIC hit losses during the 1980s. Because FHLBanks’claim on t r f assets was senior to that of the hit FSLIC, lending to troubled t r f s increased the risk of loss to the FSLIC and potentially added to hit the cost of t r f failure resolutions. As a r s l , taxpayers and policymakers have an interest in hit eut understanding the economic role of the FHLBank System in the t r f debacle of the 1980s and hit how a given government regulatory structure can have unintended consequences. During the t r f debacle of the 1980s, FHLBank advances to individual t r f s varied hit hit considerably in terms of net worth and borrowings relative to the t r f s t h i t ' otal assets. This variation makes i possible to t s hypotheses about the borrowing of financially distressed t et t r f s One hypothesis i that FHLBanks made credit available to the most troubled t r t s i e , hit. s h i f , .. those with the largest gap between their regulatory accounting principle (RAP) capital and generally accepted accounting principle (GAAP) capital. R A P allowed t r f sto count, as part of hit cap t l net worth certificates issued by the Federal Home Loan Bank Board (FHLBB) to ia, increase recorded, though not economic, net worth, appraised equity cap t l and qualifying ia, subordinated debentures, and to defer losses on the sale of assets that bear below-market interest r t s 5 These items capture the extent to which t r f regulators allowed t r f s to “invent” assets ae. hit hit that a t f c a l inflated their cap t l Thrifts with most of their reported capital in these forms riiily ia. might not be able to raise noninsured sources of funds in the private sector. FHLBank lending to the financially distressed t r f s with the largest gap between R A P and G A A P capital would have hit 2 given them time to attempt to recover, but also i would have given them time to “gamble for t resurrection” by making large volumes ofhigher-risk, potentially high-profit investments. Ifthe investments made good, the t r f would reap the p o i s but i the investments soured and the hit rft, f t r f went broke, the FSLIC and not the t r f ' owners would be liable for the losses. This hit hits incentive to gamble for resurrection i strongest when there i l t l equity l f . Thus, i i likely s s ite et ts that the magnitude and cost to taxpayers ofthe 1980s t r f debacle were increased by regulatory hit forbearance policies, including FHLBanks’provision of aid to financially distressed firms.6 In addition to examining whether financially distressed t r f smade greater use of hit FHLBank advances than financially sound t r f s we consider whether the pattern of borrowings hit, differed by FHLBank d s r c s Because of the collapse of the o l industry and i sassociated itit. i t effect on real estate prices in the early 1980s, many t r f institutions in the ninth d s r c of the hit itit FHLBank System (Arkansas, Louisiana, Mississippi, N e w Mexico, and Texas) became insolvent.7 In some s a e , congressional pressure persuaded t r f regulators to grant forbearance tts hit and increased access to the FHLBank advance program to aid poorly capitalized i s i utions. ntt The arti l i organized into six sections. The f r tsection provides information on the ce s is FHLBank System, both to describe the regulatory structure ofthe t r f industry and to document hit the evolution of this system during the l s several decades. Section two examines the financial at condition and characteristics of FHLBanks. Section three discusses the FHLBank membership requirements and how the mix of members have changed over time. Section four explains the economic role of FHLBank advances and reports on the extent to which advances were used by financially troubled t r f s Section five looks at the relationship between FHLBank advances hit. and several measures of a t r f financial condition. Section six concludes. hit 3 Structure of the F H LBank System The financial distress that t r f s experienced and the accompanying disruption in the hit mortgage market during the Great Depression caused Congress to pass several b l s to stablize il the savings and home financing industry. F r t Congress passed the Federal Home Loan Act of is, 1932, creating the FHLBank System. This system, designed along the organizational structure of the Federal Reserve System, consists of 12 Federal Home Loan Banks, each serving a geographically distinct d s r c . In addition, the Home Owner’ Loan Act of 1933 created the itit s Federal Home Loan Bank Board as a federal government agency to have supervisory responsibility over the FHLBanks. The main purposes of the FHLBank System were to provide liquidity to t r f s thereby hit, facili a i g home ownership through greater availability of mortgages, and to be the primary ttn federal regulator of t r f s Similar to d s r c Federal Reserve Banks, FHLBanks are wholly hit. itit owned by member i s itutions. Prior to 1989, members included a l federal savings and loan nt l associations and state chartered savings and loans that voluntarily chose and qualified to be members.* Each member institution i required to hold an equity stake in i sd s r c FHLBank. s t itit In 1934, Congress enacted the National Housing Act which established the Federal Savings and Loan Insurance Corporation, within the FHLBB, to promote confidence in the t r f hit industry through deposit (or share capital) insurance at t r f s The i i i l deposit insurance was hit. nta $5,000 per account, similar to that at commercial banks. This amount has been increased periodically, with the l s change to $100,000 occurring in 1980. at This supervisory and regulatory structure remained in place until the late 1980s when the deterioration in the financial condition of the S & L industry caused Congress to restructure the 4 way the t r f industry i regulated and insured and improve supervisory control. The Financial hit s Institutions Reform, Recovery and Enforcement Act, which was signed into law by President Bush on August 9,1989. I abolished both the FSLIC and the FHLBB. In their place, the act t established the Federal Housing Finance Board (FHFB) as an independent agency, responsible for regulating and supervising the 12 regional FHLBanks, relinquished control ofthe insurance functions to the Federal Deposit Insurance Corporation, and transformed the supervisory and regulatory functions of the F H L B B and the FHLBanks, over t r f s to a new Office of Thrift hit, Supervision (OTS), located in the Department of the Treasury. The FHFB consists of a five-member board, including the Secretary of Housing and Urban Development.9 The Board i funded through assessments made on the 12 FHLBanks. s The FHFB ensures that the FHLBanks carry out their housing finance mission, remain adequately capitalized, and are able to raise funds in the capital market. In addition, the FHFB must ensure that the FHLBanks operate in a safe and sound manner by following regulations governing their operations. Financial condition of FHLBanks At the end of 1996, FHLBanks’t t l assets exceeded $292 b l i n up 61% from the level oa ilo, at the end of 1989 (see table 1 . The financial position of FHLBanks was precarious at best. The ) FHLBanks are capitalized through the retention of earnings and the purchase of stock by member i s i u i n . As of year-end 1996, the FHLBanks, on a consolidated basis, had a book capital ntttos (including par value of common stock and retained earnings) to t t l on balance sheet asset ratio oa of 5.5 percent.1 This ratio i slightly higher than the leverage r 0 s atio of 5 percent for depository institutions to be classified as well-capitalized under Prompt Corrective Action provisions of the 5 Federal Deposit Insurance Corporation Improvement Act of 1991. Because a l members of the l FHLBanks, except federally chartered t r f s can withdraw from membership, the permanence hit, of this capital basis i questionable at b s est. While a member’ capital stock cannot be withdrawn s immediately upon demand and an FHLBank cannot redeem stock ifthe redemption would cause the FHLBank to be undercapitalized, the temporary nature of the capital base could be of concern ifthe FHLBanks experience losses or membership becomes unattractive. Traditionally, FHLBanks held a portfolio of investment securities to earn interest income on proceeds from prepaid loans from member institutions, to invest members’overnight deposits, and have a ready source of liquidity to satisfy unanticipated demands for advances by member i s i u i n . The type of investment securities that FHLBanks can hold i determined by ntttos s their supervisory agency, and includes, among other things, obligations of the U.S. Treasury, Federal National Mortgage Association, and Government National Mortgage Association; mortgages, obligations, or other securities sold by Federal Home Loan Mortgage Corporation; and instruments a fiduciary or trust fund may invest under the laws of the state in which the FHLBank i located. Holdings of investment securities grew about 270% between the end of s 1989 and the end of 1996. The mix in the investment portfolio of FHLBanks has shifted away from U.S. Treasury securities, federal funds, and repurchase agreements to government agency se u i i s commercial paper and mortgage-backed securities (see table 2 . Since the end of crte, ) 1989, FHLBanks have increased their investments in mortgage-backed securities from $2 billion to $46 billion a the end of 1996. The rapid growth in investment securities and the s t hift in the mix ofthe investment portfolio are attributed to the need to ensure sufficient earnings to cover FHLBank obligations mandated by FIRREA and to provide sufficient dividends to attract new 6 members, particularly commercial banks." The s i t in the portfolio mix reflects a move toward hf r s i r higher yielding investments. ike, In addition to cap t l funding for the FHLBank also comes from debt issued as ia, consolidated obligations ofthe 12 FHLBanks and consists of bonds and discount notes that are limited by statute to an amount not to exceed 20 times the t t lpaid-in-capital stock and legal oa reserves of a l FHLBanks. Although FHLBank System debt does not cany an explicit federal l government guarantee, because the FHLBanks do operate under a federal charter and government supervision there i a perception of an implicit government guarantee. FHLBank s debt carries an AAA-credit rating and coupon income i exempt from most state and local s income taxes. FHLBanks meet their funding needs through the issuance of both fixed-rate and variablerate instruments, many of which contain complex coupon payment terms and callable features. Table 3 provides a breakdown of selected bonds issued by FHLBanks during 1993 and 1996. Typically, FHLBanks issue debt and then swap out the proceeds a a funding rate below the t London Interbank Offering Rate (LIBOR). As the use of derivatives by FHLBanks increased, so has the complexity of their consolidated debt obligations. The purpose for engaging in the varied instruments has been twofold. FHLBanks have increased their use of derivatives that serve as hedges of their debt obligations, advance products, investments, member deposits and a s t l a i i y management (see table 4 . There was a dramatic rise in the notional value of se/iblt ) derivatives held by the d s r c banks from roughly $7 billion ( r 70% of System’ t t l book itit o, s oa capital) in 1985 to $225 billion ( r 1406% of System’ capital) in 1996. The majority of these o, s derivatives are intended to reduce FHLBanks’exposure to interest-rate r s . Second, FHLBanks ik 7 have been very active in providing interest-rate swap services to their member i s itutions. As an nt interest-rate swap dealer, an FHLBank maintains a portfolio of customized swap contracts and manage the interest-rate risk of this portfolio using interest-rate futures contracts (see, Brewer, Minton, and Moser, 1998). Thus, FHLBanks participate in derivative markets as dealers acting as counterparties to intermediate the hedging requirements of their member institutions and to hedge their exposure to interest-rate r s . ik FHLBank membership Currently, a t r f member of the FHLBank System must purchase stock in i s d s r c hit t itit FHLBank equal to the greater of 1% of the aggregate unpaid principal balance oftheir home mortgage loans, home purchase contracts and similar obligations; .30% of t t l assets; or 5 % of oa their outstanding FHLBank advances. Member t r f s that have at least 65% of their assets in hit residential mortgages or related securities may take advances from FHLBanks as high as 20 times their FHLBank capital stock ownership.1 For members with less than 65% of their assets 2 in such instruments, their available outstanding advances would be smaller. In the l t 1980s, membership in the FHLBank System was rapidly declining as a result ae of both t r f closures and consolidations in the t r f industry. At the same time, the distinction hit hit between t r f s and commercial banks was narrowing. Many commercial banks were increasing hit theirpresence in the residential real estate market. In recognition ofthe increased role of commercial banks in the residential real estate market, Congress, in FIRREA, extended FHLBank membership to commercial banks.1 A commercial bank can qualify to become 3 members of the FHLBank System ifi has at least 10% of i s assets in residential mortgage loans t t or related se u i i s Advances to these members, however, are capped at 30% of a l advances. crte. l 8 The number of commercial banks joining the FHLBank System was slow at f r tbut by is the mid-1990s membership has soared (see table 5 . At year-end 1990,62 of 2,852 FHLBank ) members, or 2.2 percent, were commercial banks. In 1993, the number of commercial banks surpassed the number of t r f s for the f r ttime. By the end of 1996, the system membership hit is was at an a ltime high of 6,146, with commercial banks surpassing t r f sby a margin of 4,075 l hit to 1,874. Reasons sighted for the dramatic growth in membership include the wide variety of financial credit choices, the generally lower cost of borrowing from FHLBanks, the attractive dividend yield on FHLBank stock, the liquidity provided by the FHLBanks, and the preference by some commercial banks to engage in correspondent banking services ( . . check processing, eg, securities safekeeping, securities trading, automatic clearing house, overnight investment, and electronic funds transfer) with a government agency versus a competing commercial bank.1 4 While, some commercial banks have become members of the FHLBank System to take advantage of the corresponding bank services, most commercial banks recognize the importance of the FHLBank System as a source of nondeposit funds. According to Michael Wilson, director ofthe Finance Board Office of Policy Research, " a bank will not go to the Fed unless i [] t absolutely has t , but the FHLBanks are lenders of f r tr s r . Ifa member finds the [system] a o is e o t better source of funds than r t i deposits, they can borrow money with no questions asked. A eal commercial bank can factor that into i s l a i i y funding strategy. I can’ look at the Fed the t iblt t t same way." (Bush, November 1993) FHLBank advances support the home mortgage market Historically, i was believed that t r f sneeded the liquidity provided by the FHLBank t hit advance program because of the maturity mismatch between their l a i i i s and a s t . A typical iblte ses 9 t r f makes long-term, fixed rate mortgages, financed by short-term, effectively variable rate hit deposits, which can make for challenging financial management. A sudden increase in market r t s for example, can create several difficulties for a t r f i s i u i n Because incoming ae, hit nttto. mortgage interest income i based on fixed-rate mortgage loans, i cannot re-price such s t mortgages atthe higher market rates of interest Due to the long-term nature of such assets, the t r f could miss out for several years on the higher market interest rates that an institution with a hit shorter term asset structure would enjoy. Furthermore, ifthe increase in market interest rates i s sharp and unexpected and the t r f i not able to increase i sdeposit rates quickly, i could hit s t t experience substantial deposit outflows as i scustomers transfer their funds into instruments with t more attractive returns. Such a deposit outflow would make i d fficult to fund new, ti higher-yielding mortgage loans. Even i the t r f reacts to the increased market interest rate by f hit offering competitive rates to i sdepositors, i then has to pay out more than i i receiving in t t ts income from older mortgage loans. The advances provided by FHLBanks can ease some of these diffic l i s by supporting the lending activities of the t r f industry. The statement ofpolicy on ute hit advances in the Code of Federal Regulation indicates t a : ht "[t]he primary credit mission of the Federal Home Loan Banks i to provide a reliable s source of credit for member institutions...Advances generally shall be made to creditworthy members upon application for any sound business purpose in which members are authorized to engage. Such purposes include, but are not limited t , making o residential mortgage, consumer, and commercial loans, covering savings withdrawals, accommodating seasonal cash needs, restructuring l a i i i s and maintaining adequate iblte, l iquidity." (U.S. C F R 1987,531.1) By providing member institutions with access to advances of differing maturities, varying from overnight to as long as 20 years (see table 6 , FHLBanks can stabilize the flow of ) 1 0 residential mortgage loans issued by t r f s during periods of deposit outflows. The availability hit of FHLBank advances enhances the liquidity of mortgages and mortgage-related assets such as mortgage-backed securi i s Since t r f s and other depository institutions face fluctuations in te. hit their deposits, they need to hold a sufficient amount of liquid a s t . Mortgage loans and other ses longer-term assets are i l q i . But these assets can be used as collateral to borrow from liud FHLBanks. The availability ofFHLBank loans may reduce the need to carry liquid assets. This, in turn, allows member institutions to hold a more i l q i , and presumably a more profitable, liud asset portfolio than otherwise. Furthermore, the FHLBank System advances are a means to move surplus funds from regions of the country with excess funds to other areas of the country where demand for mortgage financing exceeded the local i s i u i n s supply of funds. nttto' Figure 1 shows the trend in advances over the 1980-1996 period and table 7 reports on the FHLBank lending activity in selected years from 1960-1989. As figure 1 indicates, advances to FHLBank members rose sharply during the early 1980s, reaching a peak in 1988, declined during the l t 1980s and early 1990s, and have steadily risen each year after 1991. Thrifts s i l ae tl represent the largest percentage of advances but advances to non-thrifts (primarily commercial banks) rose to $39 billion (24% of t t l advances) a the end of 1996 from $2 billion (2.5% of oa t t t l advances) a the end of 1991. FHLBanks' advances offer member institutions several oa t advantages over other sources of funds. F r t advances are immediately available. Second, is, member insdtutions have a f i amount of f e i i i y in choosing the maturity and volume of ar lxblt their advances. Third, advances do not carry the withdrawal risk associated with deposits. Fourth, unlike deposits, no reserve requirements or deposit insurance premiums are associated with advances. The results of a recent study ofthe FHLBank loan program indicated that in 1 1 addition to the traditional use of advances as a source of liquidity, advances are a particularly attractive source of funds for poorly capitalized insti u i n . Using data for the fourth quarter of ttos 1986, Garcia and Plautz (1988) show that deposit outflows are offset by increased advances. This study also found that advances to low-capital firms nationwide and in states (for example, California, Louisiana, Oklahoma, Oregon, and Texas) with the largest number oftroubled t r f s hit rose more quickly than the national average. Each of the 12 FHLBanks has the authority to setrates on advances and to establish other products that satisfy the needs of i sd s r c . Depending on regional economic factors, market t itit conditions and funding needs, loan products and risk management services are established to address the needs of local member i s i u i n . ntttos In the past, most loans to members were standard, fixed-rate advances. Recently, FHLBanks began to focus new products on their members’need to manage interest-rate risk and mortgage prepayments. Table 8 provides a l s of some of the credit products offered by it FHLBanks. As the table indicates, advances can range from overnight borrowings to longerterm instruments, have fixed or variable interest r t s be callable atthe FHLBank’ option, and ae, s contain prepayment fees on advances which are paid offprior to maturity. In addition, several of these products can be used to aid member institutions to manage their exposure to interest-rate r s . For example, an interest-rate swap i an off-balance-sheet hedging instrument used to ik s transform a t r f ’ short-term l a i i i s into long-term l a i i i s h i ts iblte iblte. A typical t r f , with an asset side dominated by long-term, fixed-rate mortgage loans and hit a l a i i y side dominated by short-term, effectively floating r t , deposits, might be interested in iblt ae exchanging floating-rate l a i i ypayments for fixed-rate payments in order to lock in a positive iblt 1 2 i nterest rate spread. The t r f thus insulates i s l against a decline in profitability when interest hit tef rates r s , but also reduces the opportunity to increase profits when interest rates f l . Interest ie al rate payments are based on the same principal amount which i s l i never exchanged, and tef s therefore, i referred to as the notional principal amount. s FHLBanks provide i t rest-rate swaps services for their member institutions to aid those ne institutions in the management of theirinterestrate and prepayment r s . In such cases, the ik FHLBanks essentially act as interest-rate swap dealers, entering into interest-rate swap transactions that meet the particular needs of the members or entering into offsetting swap transactions between a member and another party. The notional value of the interest-rate swaps reported by the FHLBank System as a result of i sdealer activity was about $22 billion in 1996 t (see table 4 . According to Bowyer and Thompson (1989), FHLBanks participated as a dealer in ) $5.5 billion of interest-rate swaps at the end of 1987. An important question i why are banks s providing services resembling those offered by investment banks, with less capital than that required of private dealers. Has the dealer market failed to provide these services to FHLBank System members? Are FHLBanks able to price more accurately the derivative instruments for members? And most importantly, i credit risk reflected in the prices charged by FHLBanks to s individual member derivative counterparties? While FHLBank interest-rate risk products provide t r f s with the opportunities to manage their exposure to unanticipated changes in hit interest r t s FHLBank advances provide t r f s access to nondeposit sources of funds. ae, hit Regulation requires that FHLBanks secure the funds advanced to member i s i u i n . ntttos This regulation i enforced by the FHLBanks’supervisory agency. The collateralization feature s of advances give FHLBanks prior claim over assets in the event of a member f i u e The alr. 13 collateral i in the form of f r tmortgages, U.S. government securities (Treasury and agency s is securities), deposits at FHLBanks and real estate assets approved by FHLBanks. While U.S. government securities and deposits at FHLBanks represent high quality collateral to secure advances, mortgages could be low quality collateral because of the possibility of poor underwriting standards, leading to substandard loans. Despite the factthat each borrowing institution has a different risk profile and the collateral might be of questionable quality, FHLBanks offer advances at a f a - a e independent of r s . In addition, advances are made by ltrt ik FHLBanks to member institutions at below risk-free r t s This i possible because FHLBanks, ae. s in turn, are able tojointly issue consolidated obligations, or debt securities to the market, paying rates lower than similar securities issued by depository i s i u i n . As indicated e r i r the ntttos ale, market i willing to accept lower investment rates partly due to the tax-exempt status of the s consolidated obligations, but also because i i pricing in an implicit government backing of the ts s c rities. eu FH L B a n k advances aid poorly capitalized thrifts Proponents of the FHLBank System argue that FHLBank advances are necessary to provide lending institutions that specialize in real estate with access to nondeposit sources of funds because such institutions have few, ifany, alternative nondeposit sources of funds. This i s especially a concern for small t r f s which may not participate in the repurchase agreement, hit, commercial paper, or brokered deposits markets. However, in 1988, advances to institutions with less than $500 million in t t l assets accounted for only 13 percent of a l advances (see table 9 . oa l ) On the other hand, t r f swith total assets in excess of $500 million relied heavily on advances in hit 1988, with some 89 percent borrowing from FHLBanks, accounting for 87 percent of tot l a 14 FHLBank advances. Furthermore, FHLBank advances, which represented 11 percent, on average, of the borrowers’t t l assets in 1988, were being used to replace more costly funding oa sources rather than to fund additional mortgage lending (see Garcia and Plautz, 1988, and Mays and DeMarco, 1989). Thrifts with t t l assets in excess of $500 million rely heavily on advances, with some 85 oa percent borrowing from the FHLBank, accounting for two-thirds of t t l FHLBank advances. oa The ten largest t r f s alone account for 25 percent oft hit otal advances, with borrowings accounting for 23 percent ofthese institutions’total as e s st. During the t r f debacle ofthe 1980s, FHLBank advances were increasingly used to hit provide lender-of-last-resort assistance to failing t r f sthat were losing deposits, particularly hit uninsured deposits. Advances have sometimes been provided to t r f sthat lacked the necessary hit collateral in exchange for a guaranty of repayment provided by FSLIC (see Garcia and Plautz, 1988). Table 10 shows the proportion of yearend t t l assets financed with advances for t r f s oa hit nationwide and for t r f s in the six states (California, Florida, I l n i , Louisiana, Oklahoma, and hit lios Texas) that accounted for the largest share of the t t l cost of failure resolutions from 1985-91.1 oa 5 Both nationwide and in five of the six s a e , insolvent t r f s that i ,t r f s with G A A P capital tts hit, s hit less or equal to zero, borrowed proportionately more from FHLBanks than solvent i s i u i n . ntttos From these limited data, insolvent t r f s appear to use more FHLBank advances than the rest of hit the industry. The tendency of FHLBanks to aid troubled t r f s raises several issues. F r t FHLBanks hit is, are providing subsidized a d Rates on advances, which are fixed a the time of borrowing, vary i. t by maturity and date of commitment but not by risk of the borrowing t r f . The rates on hit 15 advances are set by each FHLBank as a fixed spread over the System’ expected cost of funds.1 s 6 According to Garcia and Plautz (1988), these rates should be comparable to the rates that a large, well-capitalized t r f could obtain on i sown account. While a large, well-capitalized t r f may hit t hit be paying a " a r price for advances, a financially distressed association would be obtaining fi" funds a below market r t s t ae. Second, during the 1980s, aid to financially distressed t r f s by FHLBanks provided the hit funds necessary for the government to i stitute i scapital forbearance program. This program n t allowed weak (high-risk) t r f sto continue to operate without the capital constraints imposed on hit strong (low-risk) t r f s Supporters of forbearance policies argued that t r f s weakened by hit. hit technical liquidity problems— cash outflows exceeding inflows— should be given the chance to recover.1 As these temporary problems went away, the t r f s could use their new profits to build 7 hit equity and reserves against future losses. However, in the l t 1980s, forbearance was given to ae t r f s experiencing credit quality problems that far exceeded issues oftechnical liquidity. hit Forbearance programs exempted some t r f s from regulatory capital requirements for hit extended periods of time. Other t r f s in forbearance programs were allowed to invent value for hit assets that a t f c a l inflated their regulatory net worth. These included nonstandard riiily considerations of appraised equity cap t l income capital c r i i a e , net worth c r i i a e , and ia, etfcts etfcts deferred losses. FHLBanks supported the operation of forbearance programs by extending advances to many failing t r f s as they lost deposits, particularly uninsured deposits. hit Lack of reserves in the FSLIC fund prevented t r f regulators from resolving institutions hit commonly known to be beyond hope of recovery. The Competitive Equality Banking Act of 1987, among other things, required the F H L B B to give t r f stime to i i i t strategies for a hit ntae 16 return to capital adequacy. However, the evidence shows that capital forbearance was a gamble for the FSLIC and i s t cost has turned out to be significant (see DeGennaro and Thomson, 1996). The policy encouraged t r f management to gamble for resurrection by making large volumes of high-risk, hit potentially high-profit loans. Ifthe gamble paid o f the t r f would reap the prof t ; ifi f, hit is t backfired, the FSLIC would be liable for the losses. This incentive arises from the combination of deregulation, inadequate regulatory supervision, and deposit insurance premiums that are not based on r s , and i i strongest when there i l t l equity l f . Thus, the magnitude and cost of ik ts s ite et the t r f debacle in the 1980s were likely increased by forbearance policies that included, among hit other things, FHLBanks’provision of aid to financially distressed firms. Table 11 provides financial characteristics of the 205 t r f sthat were resolved by the hit FSLIC in 1988, the year before Congress passed FIRREA. Barth, Bartholomew, and Labich (1989) report that a substantial number ofthese resolved t r f shad been insolvent since the early hit 1980s. The delay in closing insolvent t r f s increased the value of access to deposit insurance hit and allowed t r f s to s i tmore risk to the deposit insurer. As table 11 shows, the t r f s hit hf hit resolved in 1988 held more commercial real estate loans, acquisition and development loans, non-mortgage loans (business and consumer), and direct investments— a l generally viewed as l riskier asset classes than residential mortgage loans— than the industry average in each of the three years prior to f i u e At the same time, FHLBank advances as a fraction of t alr. otal assets was higher a resolved t r f s than a non-resolved t r f s rising from 6.4 percent a the end of 1985 to t hit t hit, t 10.6 percent in the l s year before closure in 1988. These numbers suggest that FHLBank at advances grew as t r f capital declined; advances also grew with the extent to which regulatory hit 17 accounting practices a t f c a l inflated c p t l The result of these practices was the delayed riiily aia. closure of insolvent t r f s 1 W e examine t i issue further using a regression equation that h i t .® hs relates FHLBank advances to several factors, including the impact of regulatory accounting practices on t r f c p h i t a ital. Developing a model to explain FHLBank Advances Following Mays and DeMarco (1989), we relate the ratio of FHLBank advances to total assets to a set of variables representing a t r f ’ financial characteristics and economic h i ts environment. In order to allow for the role of capital forbearance on a t r f ’ use of FHLBank h i ts advances, we also include a variable measuring the extent to which a t r f ’ has been allowed to h i ts “invent” assets to a t f c a l inflate i s c p t l An empirical specification relating the ratio of riiily t aia. FHLBank advances to t otal assets ( j * of t r f j in period tand FHLBank d s r c k to a set of A,) hit itit correlates can be written as: 12 A j.t = Po + E f>o,, k~2 + $ 2R O A . t fxzg* * + 34FBJ / t + J * V2b v a J eJft. (1) where RISKj ,i a vector that contains the various measures of risk of the asset portfolio of t r f j s hit in period t B V A j i the ratio of book value of capital to t ; ts otal assets; ROAj ti the return on s assets; FBjti a variable that captures regulatory forbearance; FRE G k (k=2,...,12) i an indicator s s that equals to one ifthe t r f i located in the kth Federal Home Loan bank d s r c , zero hit s itit otherwise; and ejti an error term. > s 18 The risk index of a t r f ’ asset portfolio, RISKj „ i captured by a t r f ’ holdings of h i ts s hits commercial real estate (CMORT), residential mortgage loans (RMORT), and acquisition and development loans (ADL). All mortgage variables were divided by total assets. Barth and Bradley (1989) find t a , within the mortgage category, insolvent institutions rapidly increased ht their commercial real estate lending during the 1980s. Barth, Bartholomew, and Labich (1989) indicate that acquisition and development loans, which are loans to finance the purchase of land and the accomplishment of a l improvement required to convert i to developed building l t , l t os have a positive and s a i t c l y significant effect on resolution costs. ttsial The capital r t o BVA, defined as the ratio of G A A P net worth to t t l assets, should be ai, oa negatively correlated with advances. A decline in capital relative to t t l assets increases the cost oa of alternative sources of funds, making advances more attractive because the advance rate does not vary with a t r f ’ financial condition. Thus, t r f swith low capital ratios will tend to h i ts hit borrow more from their FHLBanks than those with higher capital r t o . Earnings (ROA) are ais relevant because current p o i a i i y defined as the ratio of net income to t t l assets, may be a rftblt, oa good indicator of a t r f ’ future performance. Current profitability also i a measure of an h i ts s institution’ ability to maintain c p t l A decline in R O A can be indicative of a relatively weak s aia. financial condition, and i likely to increase the cost of nondeposit sources of funds. s The extent to which regulators have permitted cosmetic inflation of capital through the use of various balance sheet “tricks” may be correlated with the ratio of FHLBank advances to t t l asse s Table 8 provides a l s of items t r f regulators included in capital during the 1980s. oa t. it hit To the extent that regulatory accounting practices delay the closure of troubled t r f s we would hit, expect these t r f s to exploit the advantages of access to f a - a e FHLBank advances. hit ltrt 19 Following Goldberg and Hudgins (1996), we measure regulatory forbearance (FB) as the difference between RAP-defined capital and GAAP-defined capi a . W e expect FB to be tl positively correlated with the r atio of FHLBank advances to t t l assets. oa One of the major distinctions between R A P capital and G A A P capital i the treatment of s gains and losses on the sale ofmortgage loans, mortgage-related securities, and debt securities. G A A P requires immediate recognition of gains and losses, while R A P allows a t r f to defer and hit amortize such gains and losses. Brewer (1989) reports that GAAP-insolvent institutions tend to hold more deferred losses per dollar of assets (DLOSS) than solvent i s i u i n . In the ntttos empirical specification, we examine the relationship between FHLBank advances and the tendency to defer loan losses. Another accounting issue i the treatment of goodwill. Goodwill consists principally of s the amount over book value paid by a t r f to acquire other t r f s To encourage healthy t r f s hit hit. hit to purchase financially distressed t r f s regulators allowed the acquiring t r f to record the hit, hit excess ofthe acquisition price over the market value of the capital of the troubled t r f as hit goodwill and to amortize i as an expense for up to 40 years.1 This would infl t the t r f ’ t 9 ae h i ts recorded c p t l helping to maintain i saura of safety. To the extent that t r f regulators used aia, t hit the advance program “to pay acquirers off’for taking over failing t r f s we would expect hit, FHLBank advances relative to t t l assets to increase with the ratio of goodwill to total assets oa (GWILL). As pointed out by Kane (1989) and Romer and Weingast (1992), interference in the regulatory process by members of Congress on behalf oft r f s in their d s r c s delayed closure hit itit and, thus, gave t r f s time to engage in more risk-taking a t v t e . According to Romer and hit ciiis 2 0 Weingast (1992), this p litical interference was especially pronounced in the Dallas FHLBank o d s r c , as Texas bankers and real estate developers complained to their lawmakers that itit regulators were “unfairly” restricting real estate loans and refusing to allow lenders to restructure bad loans. This resulted in the well-known meeting between Edwin Gray, then chairman of the FHLBB, and Jim Wright, Speaker of the House of Representatives, to work out an agreement to give t r f stime to recover from their financial distr s . 0 Because of this political interference, hit es2 lending by FHLBanks to t r f institutions i likely to vary across the 12 FHLBank d s r c s To hit s itit. capture differences in lending across d s r c s we included in the regression equation an indicator itit, variable for each FHLBank d s r c . 1 The indicator variables absorb the effects of a l factors that itit2 l are common to t r f s in the same FHLBank d s r c . hit itit Our regression equation also includes several variables that are a composite ofthe asset risk variables and the Dallas FHLBank d s r c indicator variable. These composite variables itit capture the impact of various political maneuvers in the Dallas FHLBank d s r c on advances to itit t r f i s i u i n . This allows us to determine whether t r f s in the Dallas FHLBank d s r c with hit n t t t o s hit itit higher-risk asset portfolios tended to finance a greater proportion of their assets with FHLBank advances than those with lower-risk asset portfolios.2 Finally, time binary variables are included 2 in equation (1) to control for the effects on FHLBank advances of changes in time-specific factors that are not captured by RISKj , B V A jt R O A jt and FBjt2 , >, , .3 A. Empirical results W e estimated equation (1) to examine the relationship between FHLBank advances relative to t t l assets and a set of correlates. Table 13 reports the results of these pooled cross oa section time series regression using end of year data of a l FSLIC-insured institutions from 1980 l 2 1 to 1992. The dependent variable i year-end advances-to-total assets for each i s i u i n s nttto. Column 1 in table 13 i the basic model, excluding the separate effects on advances of s deferred loan losses, goodwill, and the composite variables. Column 2 adds the separate effects of deferred loan losses and goodwill to the basic regression equation in column 1 Column 3 . expands the basic equation to include the composite variables that interact the FHLBank of Dallas indicator variable with the asset risk measures. Column 4 adds the separate measures of regulatory forbearance (deferred loan losses and goodwill) to the empirical specification in column 3 . The results in table 13 column 1 indicate that the capital ratio and the forbearance variable are both correlated with t r f s advances. Advances increases as capital declines, hit’ supporting the hypothesis that advances are particularly attractive to poorly capitalized instit t o s The coefficient on the capital r t o -0.0445, means that a one percentage point uin. ai, decrease in the capital ratio i associated with an approximately 0.04 percentage point increase in s the r atio of FHLBank advances to total assets for the average i s i u i n Thrifts that rely heavily nttto. on regulatory accounting tricks to inflate their capital tend to borrow more from FHLBanks than other i s i u i n . The coefficient suggests that a one percentage point increase in the difference ntttos between R A P capital and G A A P capital results in a 0.24 percentage point increase in the ratio of FHLBank advances to total asse s This i s a i t c l y significant at conventional l vels. t. s ttsial e The positive coefficients on commercial real estate loans and acquisition and development loans indicate that as the fraction of assets in these categories increases, institutions will borrow more. The results in table 13 also suggest that more profitable and small institutions will tend to borrow l s . Both the profitability and size effects are s a i t c l y significant at es ttsial 2 2 conventional l v l . Finally, t r f s in the Dallas d s r c tend to borrow more than t r f s in other ees hit itit hit FHLBank d s r c s except for t r f s in the FHLBank d s r c s of Boston, Topeka, and S a t e itit, hit itit etl. For example, t r f s in the Chicago d s r c had, on average, an FHLBank advances-to-total assets hit itit ratio that was 1.64 percentage points lower than that of t r f s in the Dallas d s r c . hit itit Table 13, column 2 includes measures of regulatory accounting tricks used to inflate t r f s recorded c p t l Holding everything else constant, t r f s that rely more heavily on hit' aia. hit deferred loan losses to inflate capital tend to borrow l s , while those with relatively more es goodwill tend to borrow more than other i s i u i n . The coefficient on the deferred loan loss ntttos variable suggests that a one percentage point increase in this variable i associated with a 0.27 s percentage point decrease in the FHLBank advances-to-total assets r t o Thus, a t r f with a ai. hit lower ratio of deferred loan losses to t t l assets than another t r f will borrow less from oa hit FHLBanks, even i the two institutions have the same gap between R A P capital and G A A P f c p t l Although the sale of assets with below market yields generates losses for a t r f , i i an aia. hit t s alternative to borrowing from FHLBanks, providing funds to support a t r f ’ a t v t . The h i ts c i i y results in table 13 also imply that a one percentage point increase in the goodwill ratio i s associated with a 0.17 percentage point increase in the FHLBank advances-to-total assets r t o ai. Column 3 of table 13 reports the results of including the composite variables (that i ,the s product of the Dallas FHLBank indicator variable and the risk variables) in the basic regression equation. The t t l impact on the advances r oa atio of t r f s in the Dallas d s r c o , say, changes in hit itit f residential mortgage loans i the sum of the coefficients on the residential mortgage loan r t o s ai, 0.0149, and the residential mortgage loan r atio composite term, -0.0517. Similar calculations are performed to determine the impact on the advances ratio of t r f s in the Dallas d s r c of hit itit 2 3 changes in the other mortgage loan categories. For t r f s outside the Dallas d s r c , the hit itit coefficients on the mortgage loan ratios capture the impact on those t r f s advances r t o hit’ ai. When the composite terms are added to the basic specification, the coefficient estimates on the c apital, forbearance, earnings, and size variables are qualitatively similar with those in column 1 For example, the capital ratio continues to be negatively correlated with the advances . r t o though the coefficient estimate i -0.0457 in this empirical specification compared with ai, s -0.0445 in the basic model in column 1 The results in column 3 suggest that t r f s in the Dallas . hit FHLBank d s r c with relatively higher assets devoted t , for example, residential mortgage itit o loans tend to borrow less than other institutions (0.0149 - 0.0517= -0.0368). This suggests that a one percentage point increase in residential mortgage loan ratio i associated with a 0.04 s percentage point decrease in the advances r t o This result i inconsistent with the stated purpose ai. s of FHLBank advances to support the residential real estate market. Table 13, column 4 combines additional measures of regulatory capital forbearance with the specification used in column 3 . The results are similar to those reported in column 3 Overall, low capital institutions borrow . more, and t r f s engaging in regulatory accounting practices make heavy use of the FHLBank hit lending f c l t . aiiy Conclusion This paper examines the FHLBank System and i srole in the t r f debacle ofthe 1980s. t hit The FHLBank System was established to extend funds to t r f s in support of their mortgage hit lending a t v t . At the time, i swas perceived that t r f s were subjected to unique liquidity ciiy t hit problems requiring a specialized lending i s i u i n While FHLBanks provide t r f s with nttto. hit access to nondeposit sources of funds, they can provide an opportunity for financially distressed 24 institutions to borrow a relatively attractive interest r t s FHLBanks are able to raise funds a t ae. t costs lower than non-governmental e t t e because of the perceived well-capitalized position of niis the FHLBanks, the tax-exempt status of their debt obligations at the s tate and local leve s and l, the implicit government guarantee. This study finds that FHLBanks have relatively low capital given their a t v t e , some of which go well beyond the a t v t e needed to accomplish their ciiis ciiis primary mission. This study also finds that financially distressed t r f s tend to borrow more hit advances from FHLBanks than other i s i u i n . In addition, the regulatory practice of allowing ntttos troubled t r f s to invent ways to inflate their recorded, but not economic, capital tends to be hit associated with more borrowings from FHLBanks. 2 5 Footnotes 1. Thrifts include savings and loan associations and some savings banks. This term has been used to apply to a ltypes of depository institutions that are not commercial banks. l 2. See the C B O (1993) study for an excellent discussion of the savings and loan (S&L) debacle of the 1980s. 3. See Garcia and Plautz (1988) for an excellent discussion of the collateralization requirements ofthe FHLBank System and how troubled S&Ls were able to get around these requirements. 4. The FSLIC’ policies and procedures for guaranteed advances specify that guarantees s will be provided for advances only ifthe insured S & L i a supervisory case that 1 i book-value s ) s insolvent, 2) i cash insolvent, 3) i losing money so that i will soon become book-value s s t insolvent, 4) has insufficient collateral to obtain an advance without a guarantee, and 5) has agreed to be merged when the FSLIC can find a suitable merger partner. See Garcia and Plautz (1988) for an excellent discussion of this program. 5. In October 1984, the F H L B B placed a sunset provision on the use of deferred losses on the sale of mortgages that bear below-market interestr t s After October 24,1984, Thrifts were ae. prohibited from amortizing losses on sales of new mortgages. However, they were s i lallowed tl to defer losses on loans made prior to October 24,1984. See Hill and Ingram (1989) for a discussion of this point. 6. Hunter, Verbrugge, and Whidbee (1966) found significant evidence of forbearance in the regulation of de novo t r f s in the 1980s. hit 7. An alternative explanation i that the problems in the Dallas FHLBank d s r c were s itit because of the failure ofthe FHLBank’ supervisory staffto adequately control the high-risk s behavior of member t r f s See Cole (1993,1990) for a discussion of this issue. Another hit. explanation i that congressional pressure persuaded t r f regulators, not only in the Dallas s hit FHLBank d s r c but in other FHLBank d s r c s to grant forbearance and increased access to itit itit, the FHLBank advance program to aid poorly capitalized i s i u i n . ntttos 8. Although insurance companies and mutual savings banks were eligible for membership, few, i any, of these institutions applied for membership. f 9. The President ofthe United States appoints the other four directors. By law, the four appointed directors must have backgrounds in housing finance or a demonstrated commitment to providing specialized housing c e i , and one such director must have a background with an rdt organization that has a two-year record of representing consumer or community interests on either banking services, credit needs, financial consumer protection, or housing. 26 10 . Retained earnings represent only about 3 % of t t l equity c p t l oa aia. 11. Part of the restructuring by FIRREA included annual contributions toward financing the resolution of insolvent institutions and toward affordable housing programs for low-income homebuyers. $30 billion of debt was issued by the Resolution Funding Corporation and used by the Resolution Trust Corporation to finance the sale and closure of problem savings and loans. The Act requires the regional Federal Home Loan Banks to collectively pay $300 million toward the interest on this debt, which does not mature until 2030. The Affordable Housing Program provision of FIRREA requires that the system contribute $100 million toward a fund that will grant interest-subsidized loans to low-income homebuyers. 12. Section 303 of FIRREA requires, among other things, that t r f shold at least 70 percent hit of theirportfolio assets in residential mortgages, mortgage-backed securities and other very narrowly specified assets classes to be able to borrow from an FHLBank. Portfolio assets equal t t l assets less fixed assets, less goodwill and other intangible assets and less liquid assets in oa excess of 10% of t otal assets. This Qualified Thrift Lender (QTL) requirement has been reduced to 65 percent. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 expanded the menu of assets that can be used to satisfy the Q T L t s . These assets include et educational, credit card, and small business loans. Qualified Thrift Lenders must have at least 65% of assets in mortgages or mortgage-related securities for nine months on a monthly average basis. Prior to 1980, an institution was limited to borrowing a maximum of 12 times the value of i sFHLBank stock. t 13 . This act also extended membership to credit unions. 14 . Some FHLBanks provide financial advisory services, trading and risk management software, and educational seminars. A few FHLBanks offer specialized to aid member institution in the management of i t rest-rate r s . For example, the FHLBank of Chicago has a ne ik new pilotprogram in which a member institution s l s mortgage loans to the bank rather than to el the Federal National Mortgage Corporation or the Federal Home Loan Mortgage Corporation. The member retains the servicing rights and most ofthe credit r s , while the FHLBank manages ik the inter s - a e risk and generates greater income for the FHLBank than with traditional etrt investments (see Muolo, 1997; and O'Sullivan, 1997). The member institutions also will benefit by paying lower credit guarantee f e . The Federal Home Loan Mortgage Corporation and es Federal National Mortgage Association charge a f a fee between 20-25 basis points, independent lt of regional charge-offdifferences. Therefore, FHLBank d s r c s with fewer loan defaults, like itit Chicago, subsidize d s r c s with more defaults, like San Francisco (not surprising, this d s r c i itit itit s among the group opposed to the pilot program). 15. See Barth, Bartholomew, and Labich (1989). 16. The permissible spread over the FHLBank System’ expected cost of funds i limited by s s i ssupervisory agency. See Mays and DeMarco (1989) for a discussion ofthis point. t 27 17. Kaufman (1972) used the term technical liquidity problems to refer to a situation in which a t r f i s i u i n as a result of an unanticipated rise in interest r t s generates hit ntt t o , ae, insufficient current accounting earnings on assets to finance competitive deposit r t s ae. 18 . In their analysis of de novo t r f s Hunter, Verbrugge, and Whidbee (1996) found that hit, capital was a key factor contributing to the delay in closing failed t r f s hit. 19. See Barth (1991) for an excellent discussion of this issue. 2 0. See Hunter, Verbrugge, and Whidbee (1996) for a discussion of the so-called Gray e f c , fet that i ,the tendency of the regulators to keep t r f s open in hopes of a miraculous recovery. s hit 21. W e excluded one of the FHLBank d s r c indicator variables to avoid the “dummy itit variable trap.” By including an intercept term and separate indicator variables for each d s r c , itit we would have a problem of perfect multicollinearity, whereby the sum of the d s r c indicator itit variables i equal to one and i perfectly correlated with the intercept term. To avoid this dummy s s variable trap, researchers omit one of the indicator variables (see Greene, 1997, p.230). 2 2. See Romer and Weingast (1992) for a discussion ofthe role politicians played in prolonging this c i i in the Dallas FHLBank d s r c . rss itit 2 3 . For a discussion of the existence of “other effects” in pooled cross-sectional time-series analysis see Balestra and Nerlove (1966). 2 8 Reference Balestra, Pietro and Marc Nerlove. "Pooling Cross-Section and Time-Series Data in Estimation of a Dynamic Model: The Demand for Natural Gas," E c o n o m e t r ic a 34(July 1966), 585-612. Barth, James R. "The Great Savings and Loan Debacle.” Washington, D.C.: The AEI Press, 1991. Barth, James R., Bartholomew, Philip F , and Labich, Carol. "Moral Hazard and the . Thrift Crisis: An Analysis of 1988 Resolutions." S t ru c tu re a n d C o m p e titio n , P r o c e e d in g s o f a C o n fe r e n c e o n B a n k Federal Reserve Bank of Chicago, (May 1989), 344-384. Barth, James R. and Bradley, Michael G. "Thrift Deregulation and Federal Deposit Insurance." J o u r n a l o f F in a n c ia l S e r v ic e s R e s e a r c h 2(September 1989), 231-259. Barth, James R. and Regalia, Martin A. "The Evolving Role of Regulation in the Savings and Loan Industry," in T h e F in a n c ia l S e r v ic e s R e v o lu t io n : P o lic y D ir e c t io n s f o r th e F u t u r e , Catherine England and Thomas Huertas ( d . , Norwell, MA: Kluwer Academic Publishers, es) 1988. Benston, George J “An Analysis of the Causes of Savings and Loan Association . Failure.” M o n o g r a p h S e r ie s in F in a n c e a n d E c o n o m ic s . Salomon Brothers Center for the Study of Financial I s itutions, 1985. nt Bodfish, Morton and A.D. Theobald. S a v in g s a n d L o a n P r in c ip le s , N e w York: Prentice- Hall, I c , 1938 n. Bowyer, Linda E. and Thompson, Andrew F. “W h o Does Rate Swaps?” L o a n B a n k B o a rd Jo u rn a l (January 1989), 24-25 29 F e d e ra l H om e Brewer I I Elijah. “The Impact of the Deposit Insurance System on S & L Shareholders’ I, Risk/Retum Trade-offs,” J o u r n a l o f F in a n c ia l S e r v ic e R e s e a rc h 9(March 1995), 65-89. Brewer I I Elijah. “Full-Blown Crisis, Half-Measure Cure,” E c o n o m ic s I, P e r s p e c tiv e s , Federal Reserve Bank of Chicago (November/December 1989), 2-17. Brewer I I Elijah, Bernadette A. Minton, and James T. Moser. “Interest-Rate I, Derivatives and Bank Lending,” Federal Reserve Bank of Chicago, Manuscript (December 1998). Bush, Vanessa. "Commercial Banks and the F H L B System." Banker S a v in g s a n d C o m m u n ity (November 1993). Cole, Rebel A. “When are Thrift Institutions Closed? A n Agency-Theoretic Model,” J o u r n a l o f F in a n c ia l S e r v ic e R e s e a r c h 7(December 1993), 283-307. Cole, Rebel A. “Agency Conflicts and Thrift Resolution Costs,” Working Paper No. 390, Financial Industry Studies Department, Federal Reserve Bank of Dallas, July 1990. Garcia, Gillian. "FSLIC is'Broke'in More Ways Than One." Cato J o u r n a l 7(Winter 1988), 727-741. Garcia, Gillian and Plautz, Elizabeth. "The Federal Reserve: Lender of Last Resort.” Cambridge: Ballinger Publishing Company, 1988. Garcia, Gillian and PolakofF, Michael. "Does Capital Forbearance Pay and IfSo For Whom?" P r o c e e d in g s o f a C o n fe r e n c e o n B a n k S t ru c tu re a n d C o m p e titio n , Federal Reserve Bank of Chicago, (May 1987), 285-305. Gilbert, R. Alton. "Determinants of Federal Reserve Lending to Failed Banks." o f E c o n o m ic s a n d B u s in e s s 47(July 1995), 397-408. 3 0 Jo u rn a l Goldberg, Lawrence G. and Hudgins, Sylvia C. "Response of Uninsured Depositors to Impending S & L Failures: Evidence of Depositor Discipline." a n d F in a n c e T h e Q u a r t e r ly R e v ie w E c o n o m ic s 36(Fall 1996), 311-325. H l , John W. and Ingram, Robert W. “Selection of G A A P or R A P in the Savings and il Loan Industry.” A c c o u n t in g R e v ie w , 64(October 1989), 667-679. Hunter, William C., Verbrugge, James A., and Whidbee, David A., "Risking Taking and Failure in De Novo Savings and Loans in the 1980s." J o u r n a l o f F in a n c ia l S e r v ic e s R e s e a r c h 10(September 1996), 235-271. Kane, Edward J . T h e G a t h e r in g C r is is in F e d e r a l D e p o s it I n s u ra n c e . Cambridge: MIT Press, 1985. Kane, Edward J . T h e S & L I n s u ra n c e M e s s . Washington, D.C.: Urban Institute Press, 1989. Kaufman, George G. "The Thrift Institution Problem Reconsidered." R e s e a rc h Jo u rn a l o f B a n k 3(Spring 1972), 26-33. Mays, Elizabeth and DeMarco, Edward J "The Demand for Federal Home Loan Bank . Advances by Thrift Institutions: Some Recent Evidence." A R E U E A Jo u rn a l 17(July 1989), 363- 379. Muolo, Paul. " s FHLB Program a Threat to Lenders?." I U .S . B a n k e r 107 (July 1997), 79-80. O’ Sullivan, Orla. "Enter the third GSE?" A B A B a n k in g J o u r n a l 89(July 1997), 74. Romer, Thomas and Weingast, Barry R. “Political Foundations of the Thrift Debacle.” In T h e R e fo rm o f F e d e r a l D e p o s it I n s u ra n c e , James R. Barth and R. Dan Brumbaugh, J . (eds), r 31 N e w York: HarperCollins Publishers I c , 1992. n. U.S. Congress, Congressional Budget Office. R e s o lv in g th e T h r if t C r is is . Washington D.C.: U.S. Government Printing Office, 1993. U.S. Federal Home Loan Bank System, C o d e o f F e d e r a l R e g u la t io n . Parts 500-1199. Washington, D.C.: U.S. Government Printing Office, 1987. White, Halbert. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and A Direct Test for Heteroskedasticity.” E c o n o m e t r ic a 3 2 48(May 1980), 817-838. Figure 1 S&L Advances 1970-1996 180,000 160,000 140.000 Advances 1 2 0 .0 0 0 1 0 0 ,0 0 0 S&L's -Total 80,000 60,000 40.000 2 0 .0 0 0 (O' -9 ^ ^ ^ Year 33 / Table 1 Financial characteristics of FHLBanks (in million dollars) Year 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Advances Investments Consolidated Obligations $1,266 $1,981 $1,233 $5,221 $5,997 $1,640 $10,615 $3,732 $10,181 $2,520 $7,936 $6,840 $2,225 $6,671 $7,979 $15,147 $3,437 $14,449 $21,804 $3,097 $19,445 $17,845 $4,376 $16,383 $14,620 $15,862 $6,079 $20,173 $16,009 $3,749 $32,670 $3,414 $25,109 $41,838 $30,372 $3,693 $37,268 $48,963 $4,328 $65,194 $8,157 $54,131 $66,011 $12,575 $55,972 $9,841 $58,977 $48,931 $17,584 $65,085 $74,618 $74,460 $88,835 $19,243 $17,388 $88,752 $108,645 $133,058 $16,538 $116,386 $152,799 $16,981 $136,513 $33,912 $141,795 $136,799 $44,280 $117,103 $118,437 $79,065 $71,740 $108,149 $79,884 $114,652 $79,133 $72,293 $138,741 $103,131 $125,893 $109,147 $200,196 $132,264 $135,426 $231,417 $161,372 $251,316 $125,231 Source: Federal Housing Finance Board. 34 Capital Stock Retained Earnings Total Capital $1,072 $83 $989 $158 $1,435 $1,277 $1,607 $260 $1,867 $1,618 $281 $1,899 $1,756 $299 $2,055 $2,122 $374 $2,496 $2,624 $539 $3,163 $2,705 $590 $3,295 $634 $2,889 $3,523 $3,295 $681 $3,976 $4,120 $837 $4,957 $5,149 $943 $6,092 $5,160 $869 $6,029 $974 $5,827 $6,801 $6,269 $1,144 $7,413 $6,395 $1,339 $7,734 $7,200 $1,503 $8,703 $8,313 $1,792 $10,105 $9,485 $2,323 $11,808 $11,281 $2,464 $13,745 $13,177 $2,343 $15,520 $13,385 $820 $14,205 $11,104 $521 $11,625 $10,200 $495 $10,695 $9,921 $531 $10,452 $10,667 $456 $11,123 $12,190 $382 $12,572 $13,892 $390 $14,282 $15,645 $450 $16,095 Total Assets $3,316 $7,806 $14,723 $11,001 $10,731 $19,066 $25,499 $22,708 $22,481 $24,566 $36,767 $46,428 $54,347 $74,680 $80,262 $72,490 $96,993 $112,179 $131,427 $154,177 $174,737 $180,677 $165,742 $154,556 $162,134 $178,897 $239,076 $272,661 $292,035 Table 2 Composition ofthe investment p r f l o ofFHLBank (percentoft t l investment) otoi oa Type ofsec r t uiy 1985 1987 1989 1991 1992 1993 1994 1995 1996 Treasury s c r t e euiis 5.57 4.76 2.79 1.62 4.05 5.92 3.68 1.25 1. 0 4 Federal agency s c r t e euiis 0.33 0.53 0.55 0.00 15.16 12.40 10.55 12.20 11.34 75.76 71.27 62.93 44.53 34.49 33.56 30.40 39.98 29.93 Bankers’acceptances 0.37 0.22 0.34 0.00 0.00 0.00 0.00 0.00 0.00 CDs 0.97 17 .1 0.97 0.00 0.00 0.00 0.00 0.00 0.00 16.96 20.19 20.60 0.00 0.00 0.00 0.00 0.00 0.00 S c r t e repurchase euiis agreements 0.00 0.00 0.00 15.17 12.33 7.66 13.06 6.46 3.96 Commercial paper** 0.00 0.00 5.88 9.75 0.00 0.00 7.82 5.89 13.93 Mortgage-backed scrte euiis 0.00 0.00 6.23 21.33 29.06 32.18 30.08 29.88 36.63 Other s c r t e euiis 0.03 1.74 0.00 7.69 4.91 8.28 2.42 4.34 2.82 Federal funds FHLBank consolidated s c r t e fund* euiis Total d l a investment olr ( n b l i nd l a s i ilo olr) 1. 93 17.4 32.0 72.4 79.7 72.9 106.7 135.9 125.0 The consolidated s c r t e fund i a c n r l z dp r f l o management system fo s c r t e owned by FHLBanks operated by the Office ofFinance and euiis s etaie otoi r euiis in e t primarily i short-term money market i s r vss n n t uments. *‘Beginning i 1996, commercial paper a s containsbank n t s n lo oe. * Source: Federal Housing Finance Board. 35 Bond type Fixed-Rate Step-Up Simple Variable-Rate Inverse Floating-Rate Fixed that Converts to Variable Variable that Converts to Fixed Comparative Index Other Total Discount Notes $120,421,123 00 00 >s * 0p * Table 3 Consolidated debt obligations ofFHLBanks 1989 1993 $63,591,486 $8,090,000 $11,675,600 $4,631,500 $6,055,113 $775,000 $4,652,210 $3,621,000 $103,091,909 $16,378,115 $136,799,238 12% 100% $35,652,992 $138,744,901 Source: Federal Housing Finance Board 36 46% 6% 8% 3% 4% 1% 3% 3% 74% 1996 $144,205,733 $7,419,000 $19,927,392 $819,025 $4,181,960 $446,098 $1,246,685 $1,932,760 $180,178,653 26% $71,125,221 28% 100% $251.303,374 100% 57% 3% 8% 0% 2% 0% 0% 1% 72% Table 4 Derivatives activity of FHLBank System, 1991-1996 (in billion dollars)________________________________ Purpose Derivatives wherein FHLBank acts as a dealer 1991 1992 1993 1994 1995 1996 3.0 3.2 ' 4.7 8.5 25.2 21.9 42.5 56.2 73.2 94.6 115.9 148.0 Advances 1.7 1.9 7.8 7.2 17.4 31.7 Investments 3.6 4.3 9.4 17.9 21.4 23.0 Derivatives used as hedges Consolidated obligations Held to maturity securities na .. na .. 9.3 14.7 20.5 22.3 Available for sale securities na .. na .. 0.0 3.1 0.9 0.7 na .. na .. 0.7 0.7 0.2 0.4 6.7 5.9 4.8 47.8 69.2 96.7 125.2 154.8 203.0 50.8 74.4 101.3 133.7 180.0 224.9 Deposits Derivatives used for a s t l a i i y se/iblt management Total of Derivatives used as hedges Total Derivatives na .. na .. na .. Type Interest-rate swaps na .. na .. 92.5 124.2 168.5 210.0 Interest-rate caps na .. na .. 3.9 6.3 7.0 8.9 Interest-rate floors na .. na .. 2.4 2.6 2.6 4.5 Financial futures na .. na .. 2.3 0.0 0.0 1.0 na .. na .. 0.2 0.5 1.8 0.6 Other Source: Federal Housing Finance Board 37 Table 5 FHLBank membership Isiuin ntttos Savings and loan associations 1989* 1990 3217 1992 1991 1994 1993 1995 1996 2528 2291 2176 2067 1969 1874 - Commercial banks 2789 508 1295 2202 3133 3641 4072 Creditunions - - - 26 57 86 140 170 Insurance companies - - - 12 16 21 25 30 3217 2852 ; 3064 3624 4451 5307 5775 6146 141.8 - 76.2 72.3 85.2 97.6 95.9 119.1 Non-savings and loan associations ~ - 2.1 6.5 16.7 26.6 33.7 39.5 Other** - - i 0.8 1.1 1.2 17 . 2.7 2.8 141.8 81.9 ! 79.1 79.9 103.1 125.9 132.3 161.4 Total members Advances ( nb l i n d l a s i ilo olr) Savings and loan associations Total advances Source: Federal Housing Finance Board 3 8 Table 6 Maturity distribution of FHLBank advances (in million dollars) Percent 1987 1 year 2 years 3 years 4 years 5 years Greaterthan 5 years Total 50,803 20,235 15,057 14,187 10,597 22,175 11 11 8 17 133,055 98,324 24,885 11,515 5,972 8,941 10,632 161,396 Source: Federal Housing Finance Board Percent 1996 38 15 3 9 61 15 8 4 5 7 Table 7 FHLBank lending activity (in million dollars)_____ Advances Year Made Repaid Outstanding percent 1960 1,943 2,097 1,981 2.9 1965 5,007 4,335 5,997 4.7 1970 3,255 1,930 10,615 6.2 1971 2,714 5,392 7,936 3.9 1972 4,792 4,750 7,979 3.4 1973 10,013 2,845 15,147 5.7 1974 12,763 6,106 21,804 7.5 1975 5,468 9,425 17,845 5.4 1976 8,114 10,097 15,862 41 . 1977 13,756 9,445 20,173 4.5 1978 25,166 12,800 32,670 6.3 1979 29,166 19,998 41,838 7.3 1980 36,585 29,460 48,963 7.9 1981 53,941 37,709 65,194 10.0 1982 53,744 52,928 66,011 9.5 1983 44,724 51,758 58,977 7.8 1984 91,239 75,598 74,618 8.4 1985 133,651 119,417 88,835 9.4 1986 181,661 161,833 108,645 9.3 1987 194,381 170,000 133,058 10.6 1988 187,536 167,809 152,799 11.5 1989 218,876 229,874 141,795 11.3 Source:Savings I stitutions Sourcebook, United States League of Savings I s i u i n , 1987; FHLBanks n ntttos Financial Reports, 1987-1989; and Savings and Home Financing Source Book, 1989, OTS, Washington, D.C. 4 0 Table 8 Selected products offered by FHLBanks Since the passage ofFIRREA, FHLBanks have been expanding the product mix ofadvances offered to t e r hi member thrift’. There are several f c o s contributing to t i change i behavior. F r t i i l k l t a the thrift’ s atr hs n is, t s i e y h t s have developed a more sophisticatedr s management approach, demanding more complex products to meet t e r ik hi needs. Furthermore, FHLBanks have become more customer-focused since FIRREA. In an e f r t meet t e r fot o hi f n n i l obligations mandated by FIRREA, FHLBanks have expanded t e radvances. F n l y as industry f n n i l iaca hi ial, iaca s a i i yhas improved, the FHLBanks also face greater competition i providing c e i and r s management s r i e . tblt n rdt ik evcs As thrift’ become l s r s y i s i u i n otherthan the FHLBanks become more willingto lend todiem. s es ik, ntttos Inthe 1990 FHLBanks’annual r p r s a few d s r c shighlighted one or two new advance products. eot, itit However, the advances offeredwere primarily simple f x d variable or amortizing l a s By the year 1996, the ie, on. FHLBank annual reports and web pages boasted nearly one dozen d f e e tadvance and r s management products, ifrn ik severalofwhich were introduced during the y a . The following ta l represents a basic product ls,with each er be it FHLBank customizing i menu ofproducts according to t e rmembers’demand. t hi Product Description Adjustable-rate advances Adjustable-rate advances based on the borrower choice of many different indices (LIBOR, prime, or Treasury r t ) ae. Amortizing/Principal reducing advances Offers borrowers a fixed rate on a payment structure that matches amortizing mortgage loans with a balloon payment at maturity. May also include an option to prepay additional principal once a year. Callable/Convertible advances multiple A below-market fixed-rate advance with embedded c l options allowing the FHLBank to c l the loan at al al specified dates, thus requiring the borrower to repay the loan or convert to an adjustable-rate. Capped floateradvances An advance charging a variable-rate based on a spread over some index, with a specified maximum rate that can be charged. Fixed-rate advances Fixed-rate advances with short or long maturities. Putable/Retumable fixed-rate advances A fixed-rate advance with put options enabling the bank to repay a portion or the entire amount at designated intervals without repayment fees. Repo advances A fixed-rate advance with same day funding a a l b l t . viaiiy Cash management advances Fixed- or variable-rate overnight funding. Short-term advantage advances Short-term fixed-rate source of funds. Forward rate commitments A rate lock for advances that w l occur i 3-24 months. il n Interest-rate caps, f o r , and collars los Off-balance sheet instruments used to manage interestrate r s . ik 41 Table 8 (Cont’d) Interest-rate swaps Line of credit Interest-rate r management products that take isk advantage of FHLBank AAA-credit r t n . aig Backup l q i i y source. iudt 4 2 Table 9 FHLBank thrift and Commercial Bank Members, Deember 31,1996 Advances toBorrower a s t ses (Percent) Asset Size Percent t a Borrow ht Number ofI s i u i n ntttos Thrifts () 2 (1) () 3 Share ofa lOutstanding l Advances (Percent) () 4 1595 61.4 10.2 9.8 279 88.5 14.4 65.4 3687 51.3 3.9 6 4.$500 million or more 377 72.1 31 . 17.6 5 Ten Largest thrifts . 10 100 13.4 20.2 1 Less than $500 million . 2.S500 million or more Commercial Banks 3 Less than $500 million . Source: Federal Housing Finance Board 43 Table 10 Federal Home Loan Bank Advances oft r f s (December 31 ofeach year) hit (Percent oft t la s t ) o a s e s __________________________________ Years Capital r t o ai 1985 1986 1987 1988 1989 1990 1991 9.37 10.82 9.52 7.40 4.04 4.82 5.16 6.91 7.78 7.86 6.79 5.51 2.77 3.24 4.13 4.29 3.67 3.14 2.83 3.78 4.25 5.34 2.49 4.93 3.79 3.04 Less than or = to 0% 9.81 8.09 3.29 3.48 3.14 8.21 2.17 Between 0 and 3% 5.30 5.90 5.08 6.81 6.26 5.20 11 .3 Greater than 3 % 3.54 3.79 4.54 5.08 5.25 5.77 5.37 Total s a e tt 8.05 Total industry FL 6.75 Greater than 3% CA Less than or = to 0% Between 0 and 3% Total Industry 4.70 4.70 4.40 5.15 5.11 5.82 4.91 Less than or = t 0 % o 6.38 7.48 9.56 10.85 8.00 9.28 2.47 Between 0 and 3% 5.40 5.63 8.58 9.95 7.49 3.90 2.76 Greater than 3% 3.37 4.34 5.45 6.14 4.99 3.95 4.49 Total s a e tt 4.21 4.92 6.43 7.20 5.80 4.67 4.09 44 Table 10 (Cont’d) Years Capial r t o ai 1985 1986 1987 1988 1989 1990 1991 6.09 6.29 4.78 6.01 6.18 3.67 3.38 4.15 4.33 3.62 3.19 1.08 1.24 2.07 2.45 2.06 1.92 1.68 1. 8 2 2.33 2.76 3.50 3.12 2.57 1.92 1.38 12.32 10.85 13.10 15.77 12.13 6.73 1.87 Between 0 and 3 % 4.60 4.33 5.05 5.40 2.24 0.90 1.56 Greater than 3 % 2.33 2.62 3.65 5.32 3.54 1.32 0.56 Total s a e tt 4.19 Total s a e tt OK 3.51 Greater than 3 % LA Less than or = t 0% o Between 0 and 3 % IL 5.49 5.25 6.43 8.81 6.53 2.81 0.75 Less than or = t 0% o 5.99 8.74 11.57 7.87 9.07 9.72 0.00 Between 0 and 3% 8. 1 3 7.60 10.69 10.67 11.35 7.95 0.71 Greater than 3% 5.50 5.20 5.45 9.11 5.24 6.92 4.97 Total s a e tt 6.07 6.77 8.84 9.48 8.03 7.58 3.85 Less than or = t 0 % o 45 Table 10 (Cont’d) Years Capital r t o ai 1985 1986 1987 1988 1989 1990 1991 Less than or = to 0% 6.26 9.97 11.30 13.86 10.24 5.86 0.00 Between 0 and 3 % 3.88 4.38 6.40 10.64 14.77 6.69 0.40 Greater than 3 % 4.31 4.26 5.80 7.03 5.02 5.49 4.80 Total s a e tt TX 4.52 6.01 8.36 10.45 9.19 5.75 4.08 In this table, thrifts are divided into three groups: (1) thrifts with negative book equity according to generally accepted accounting principles (GAAP); (2) low-capital (that is, positive net worth below 3 percent of assets); and (3) well-capitalized thrifts (with net worth above 3 percent o f assets). Source: Federal Reserve Board ofGovernors, Savings a n d Loan Regulatory Reports, yearend 1985-91. 46 Table 11 Federal Home Loan Bank advances and other f n n i l c a a t r s i s of 1988 resolutions (205) iaca hrceitc (Percent oft t la s t ) oa se s Financial r t o ais 1986 1985 1987 1988 fiue alrs Industry 1988 fiue alrs Industry 1988 fiue alrs Industry Residential 34.84 50.84 33.06 48.27 32.78 48.86 Commercial 13.76 8.52 12.65 8.48 11.96 8.31 Land 9.50 2.53 8.55 2.40 6.00 1.98 Others 12.54 11.44 12.17 12.03 11.76 13.58 Nonmortgage loans 7.18 5.48 7.45 5.65 6.91 5.66 Direct investment 4.72 1.29 5.06 1.36 5.35 1.37 Junk bonds 0.15 0.10 0.16 0.10 0.15 0.10 Advances 6.39 3.78 8.33 4.25 10.65 5.34 RAP 16 .1 5.26 -5.57 4.82 -19.41 3.60 GAAP -0.84 4.13 8.10 3.77 -22.14 2.65 TAP -2.56 3.30 -9.74 2.98 -23.55 18 .3 ROA -0.48 0.04 -2.08 -0.13 -2.84 -0.30 Mortgage loans Source: Federal Reserve Board ofGovernors, Savings a n d L o a n Regulatory Reports,yearend 47 1985, 1986, and 1987 Table 12 Items used to a t f c a l r i e recorded c p t l riiily a s aia 1. Losses from the s l ofa s t with below market yields can be deferred (1981). Generally accepted ae ses accounting principles (GAAP) does not permit t i type of account to be included i c p t l hs n aia. 2 . The Federal Home Loan Bank Board (FHLBB) allowed qualifying mutual c p t l c r i i a e to be used by aia etfcts savings and loans to increasereported networth (1980). 3 . Income c p t l c r i i a e are sold ( o cash or interes - e r n notes)tothe Federal Savings and Loans a i a etfcts fr tbaig Insurance Corporation (FSLIC) to increase reported net worth (1981). This item was included in GAAP net worth i 1984. n 4 . Net worth c r i i a e are authorized by the Gam-St Germain Depository I s i u i n Act of 1982 to etfcts ntttos increase reported net worth (October 1982). 5 . Contra-asset accounts, including loans i process, unearned discounts, deferred fees and c e i s are n rdt, included i net worth (June 1982). n 6. Appraised equity c p t l(excess over book value ofappraised value ofo f c l n , buildings and aia fie ad improvements, as permitted by the FHLBB) i included i net worth (1982). s n 7 . Qualifying subordinated debentures having remaining term to maturity or term to redemption exceeding one year are included i net worth (1982). n 8. Equity can be increased by the amount ofgoodwill and other intangible a s t r sulting from a merger. ses e Goodwill i the difference between the market value ofa firm’ net worth and the value based on tangible s s a s t only. Goodwill represents the value ofa f a c i e including name recognition, an established ses rnhs, r p t t o , and loyal customers. For many t r f s goodwill was booked as c p t lwhen they acquired euain hit, aia other e t rprises a greaterthan tangible a s tval e ne t se u. Source: Barth (1991). 4 8 Table 13 Relationship between advances and f n n i l c a a t r s i s ofFSLIC-insured thrifts over the 1980-1992 period iaca hrceitc This ta l provides the regression r s l softhe r l be eut e ationship between the r t o ofFHLBank advances to ai t t la s t and selected f n n i l c a a t r s i s ofFSLIC-insured t r f s The c t variables are binary variables oa s e s iaca hrceitc hit. iy forFHLBank d s r c s The omitted binary variable i the Dallas FHLBank d s r c . The variable T D U M i equal t itit. s itit s o one i year i greaterthan or equal to 1990, zero otherwise. C M O R T i commercial r a e t t divided by t t l f s s el sae oa a s t ;R M O R T i r s d n i lr a e t t divided by t t la s t ;ADL i acquisition and development loans divided ses s eieta el sae oa ses s by t t la s t ; R O A i net income divided by t t la s t ; SIZE i the natural logarithm oft t la s t ; BVA i oa s e s s oa s e s s oa ses s generallyaccepted accounting principle c p t l divided by t t la s t ; FB i the difference between regulatory aia oa ses s accounting principle c p t l and generally accepted accounting principle c p t ldivided by t t la s t ; LOSS i aia aia oa ses s deferred l ssesdivided by t t la s t ; GWILL i intangible a s t (primarily goodwill) divided by t t la s t ; and o oa ses s ses oa ses N U M B E R i die number ofobservations. The numbers i parentheses below the coe f c e testimates are t s n fiin s a i t c ; * ind c t s significance a f l 10% l v l ** indicate significance a the 3% l v l and *** i d c t ttsis iae t ie ee; t ee; niae significance a fl 1 % l v l t ie ee. 0) () 2 () 3 (4) -0.1197 (2.8** -75)* -0.1163 (2.8** -64)* -0.0901 (1.5** -69)* -0.0884 (1.1** -65)* 0.0170 (.5** 83)* 0.0177 (.1** 87)* -0.0198 (33)* -.7** -0.0172 (29)* -.0* New York -0.0164 (1.5** -07)* -0.0154 (1.9** -00)* -0.0522 (92)* -.4** -0.0493 ( 8. )* - 66 ** Pittsburgh -0.0113 (73)* -.9** -0.0105 (68)* -.5** / TN 00 u > • • • Variable -0.0479 -0.0452 (78)* -.2** Atlanta -0.0086 (65)* -.1** -0.0079 (59)* -.7** -0.0463 (80)* -.9** -0.0436 (75)* -.6** Cincinnati -0.0132 (99)* -.0** -0.0125 (93)* -.7** -0.0500 (88)* -.1** -0.0474 (82)* -.9** Indianapolis -0.0127 (83)* -.3** -0.0119 (77)* -.9** -0.0493 (-8.62)* *• -0.0465 (80)* -.7** -0.0164 (1.2** -29)* -0.0158 (1.6** -24)* -0.0525 (94)* -.7** -0.0500 (89)* -.5** Des Moines 0.0002 (0 - .13) 0.0006 (0.38) -0.0367 (65)* -.3** -0.0339 (59)* -.9** Topeka 0.0261 (44)* 1.7** 0.0271 (50)* 1.2** -0.0113 (19)* -.8* -0.0084 (1 - .46) San Francisco -0.0055 (29)* -.6** -0.0048 (25)* -.7* -0.0427 (72)* -.3** -0.0401 (67)* -.3** Sate etl 0.0383 (55)* 1.3** 0.0390 (59)* 1.0** 0.0011 (0.18) 0.0037 (0.60) Itret necp Boston Chicago 49 Table 13 (Cont’d) TDUM -0.0133 (-7.09r* -0.0123 (65)* -.3** -0.0125 (68)* -.1** -0.0116 (62)* -.9** CMORT 0.0720 (18)* 1.4** 0.0737 (21)* 1.6** 0.0897 (31)* 1.0** 0.0905 (32)* 1.6** -0.0969 (52)* -.8** -0.0932 (50)* -.6** 0.0149 (.5** 68)* 0.0164 (.7** 75)* -0.0517 (68)* -.2** -0.0484 (63)* -.4** 0.0973 (.6** 62)* 0.0967 (.5** 62)* -0.1179 (49)* -.0** -0.1174 (48)* -.8** C M O R T x Dallas — RMORT 0.0063 (.3** 30)* R M O R T x Dallas — ADL 0.0375 (.1** 30)* ADL x Dallas — — 0.0085 (.3** 42)* — 0.0361 (.0** 29)* — ROA -0.2358 (25)* -.2* -0.2284 (24)* -.4* -0.2304 (24)* -.9* -0.2240 (24)* -.2* SIZE 0.0140 (59)* 4.5** 0.0135 (29)* 4.7** 0.0141 (76)* 4.5** 0.0135 (43.92)*“ BV A -0.0445 ( 2 . )* - 00 * -0.0450 ( 2 . )* - 02 * -0.0457 ( 2. 1 )* - 2 * -0.0462 ( 2 . 1 )* - 2 * 0.2441 (.4** 56)* 0.4610 (4.14)“* 0.2392 (.8** 57)* 0.4469 (. 4 13)*“ FB LOSS — -0.2732 (24)* -.1* — -0.2620 (-2.36)” GWILL — 0.1688 (.7** 86)* — 0.1612 (.4** 79)* Number of observations 39381 39381 39381 39381 Adjusted R 2 0.21 0.22 0.22 0.22 FSaitc -ttsi 360.51 345.35 335.71 322.71 Source: Authors’c l u a i n . acltos 50
@FedFRASER