17 0 0 G S tre e t, N .W .
W a s h in g to n , D .C . 2 0 5 5 2
F ed eral H o m e Loan Bank S y s te m
Federal Home Loan Bank Board
F ed e ra l H o m e Loan M o rtg a g e C o rp o ra tio n
F ed e ra l S a v in g s and Loan In surance C o rp o ra tio n
O FFICE OF P O L IC Y A N D E C O N O M IC R E S E A R C H
M O R A L H A Z A R D A N D T H E T H R I F T CRISIS:
\N A N A L Y S I S OF 1 9 8 8 R E S O L U T I O N S
h r'
./JU *
R e s e a r c h Paper #160
by
J a m e s R. B a r t h
P h i l i p F. B a r t h o l o m e w
C a r o l J. L a b i c h
O f f i c e of P o l i c y a n d E c o n o m i c R e s e a r c h
Federal Home Loan Bank Board
M a y 1989
t 0
I?
i */
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Moral Hazard and the Thrift Crisis:
An Analysis of 1988 Resolutions
by
James R. Barth
Philip F. Bartholomew
Carol J. Labich*
25th Annual Conference on Bank Structure and Competition
Federal Reserve Bank of Chicago
May 3-5, 1989
F o r t h c o m i n g in t h e C o n s u m e r
Finance Lav Q u a r t e rly Rspnr^
*
James R. Barth is Chief Economist and Director of the Office
of Policy and Economic Research, Federal Home Loan Bank
Board; Philip F. Bartholomew is a Financial Economist in the
Office of Policy and Economic Research; Carol J. Labich is a
Research Analyst in the Office of Policy and Economic
Research.
The authors gratefully acknowledge helpful
comments and assistance provided by Michael G. Bradley,
David Bragg, Donald Edwards, Eric Hirschhorn, Everson Hull,
Lance Jones, Robert Pomeranz, Romelle Roeske, and David
Whidbee.
Ruby Joyner, Sharon McLeod, and Carolyn Thomas
deserve thanks for their prompt and careful preparation of
the manuscript.
The views expressed do not necessarily
reflect those of the Federal Home Loan Bank Board.
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INTRODUCTION
N o t s i n c e the G r e a t D e p r e s s i o n h a s th e t h r i f t i n d u s t r y
e x p e r i e n c e d s u c h t u r m o i l a n d u n c e r t a i n t y as in r e c e n t y e a r s .
The Federal Savings and Loan Insurance C o r p o r a t i o n
(F SL IC )
a c t i o n a g a i n s t m o r e t h a n 800 t r o u b l e d t h r i f t i n s t i t u t i o n s
1980
took
from
t h r o u g h 1 9 8 8 at an e s t i m a t e d p r e s e n t - v a l u e c o s t of n e a r l y
$50 b i l l i o n .
In a d d i t i o n ,
a n o t h e r 578 i n s t i t u t i o n s w e r e
i d e n t i f i e d in M a r c h 1 9 8 9 as r e q u i r i n g f u t u r e a c t i o n at a c o s t
j us t u n d e r $ 40 b i l l i o n .
T h e t h r i f t c r i s i s of the 1 9 8 0 s w a s
t h e r e f o r e e s t i m a t e d b y the F e d e r a l H o m e L o a n B a n k B o a r d
Board)
to c o s t
r o u g h l y $90 b i l l i o n .
e v e n t u a l l y p r o v e s to be too low,
( B ank
E v e n if t h i s e s t i m a t e
the c o s t s a l r e a d y e x c e e d t h o s e
e x p e r i e n c e d b y t h r i f t s d u r i n g the 1 9 3 0 s .
A s a r e s u l t of the e n o r m o u s c o s t of r e s o l v i n g the t h r i f t
crisis,
it w i l l be b o r n e b y n o t o n l y h e a l t h y t h r i f t s ,
taxpayers.
but also
H o n o r i n g the f e d e r a l g o v e r n m e n t ' s g u a r a n t e e
to m a k e
w h o l e al l i n s u r e d d e p o s i t s h a s p r o v e n to be m o r e c o s t l y a n d to
r e q u i r e a m o r e b r o a d l y b a s e d s o u r c e of f u n d s t h a n a n t i c i p a t e d
w h e n th e F S L I C w a s e s t a b l i s h e d in 1934.
The Congress
is
r e a c t i n g to t h i s s i t u a t i o n b y p a s s i n g l e g i s l a t i o n s p e c i f y i n g w h o
w i l l b e a r th e c o s t a n d r e q u i r i n g r e g u l a t o r y a n d s t r u c t u r a l
r e f o r m s to p r e v e n t a s i m i l a r s i t u a t i o n f r o m e v e r a g a i n
occurring.
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2
T h e p u r p o s e of t h i s p a p e r
is t h r e e f o l d .
First,
the n a t u r e
a n d m a g n i t u d e of t he t h r i f t c r i s i s w i l l be d o c u m e n t e d .
Only
w i t h a p p r o p r i a t e data can one c o m p r e h e n d e x a c t l y wha t happened,
where
it h a p p e n e d ,
a n d w h e n it h a p p e n e d .
Second,
th e c r i s i s w i l l be i d e n t i f i e d a n d d i s c u s s e d .
the c a u s e s of
Only through such
an e x e r c i s e c a n o n e p r o p e r l y a s s e s s a n y l e g i s l a t i v e
be s u r e a s i m i l a r p r o b l e m w i l l n o t o c c u r a g a i n .
important,
changes
Third,
to
and most
a n a t t e m p t w i l l be m a d e to i d e n t i f y the w a y t h a t
f e d e r a l d e p o s i t i n s u r a n c e i t s e l f c o n t r i b u t e d to th e c r i s i s .
A l t h o u g h m a n y s t u d i e s h a v e a n a l y z e d the " m o r a l h a z a r d "
arising from deposit insurance
( 19 67 ),
Sharpe
Chen,
Scott and Mayer
(1 9 78 ),
and Kane
and H e rring
knowledge,
Merton
( 19 8 1 ) ,
(1 9 8 2 ) ,
[see,
( 1971),
( 1 97 8) ,
( 19 83 ) ,
Meltzer
Kareken and Wallace
Dothan and Williams
McCulloch
Pyle
for e x a m p l e ,
(1 981),
Kane
and Kareken
n o n e h a s a s s e s s e d its e m p i r i c a l
problem
( 1 9 78 ) ,
( 19 8 0 ) ,
( 1981),
(1983)],
Buser,
Guttentag
to o u r
importance.
T h i s is
d o n e h e r e b y u s i n g t i m e - s e r i e s d a t a for a l l 205 t h r i f t
institutions
r e s o l v e d in 1 9 8 8 to e x a m i n e th e c h a n g i n g
" r i s k i n e s s " o f t h r i f t p o r t f o l i o s as c a p i t a l d e t e r i o r a t e s .
THE 1980s IN P E R S P E C T I V E
The thrift industry has undergone
recent years.
tremendous change
T o u n d e r s t a n d th e r e a s o n for al l of the a t t e n t i o n
and c o n t r o v e r s y that s u rr ounds this industry,
we have documented
s o m e of th e m o r e i m p o r t a n t c h a n g e s t h a t h a v e o c c u r r e d .
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in
3
An Overview of the Thrift Industry
In T a b l e 1 a n d C h a r t s 1 a n d 2, w e p r e s e n t i n f o r m a t i o n a b o u t
t he t h r i f t i n d u s t r y f r o m 1 9 8 0 t h r o u g h 1988.
information,
Bas e d u p o n this
o n e c a n d i s c e r n the f o l l o w i n g f ac t s .
First,
i n d u s t r y h a s b e e n u n d e r g o i n g c o n s o l i d a t i o n s i n c e 1980.
year,
there were n early 4,000 thrifts, whe r e a s
In th at
the n u m b e r
d e c l i n e d to j u s t u n d e r 3 , 0 0 0 b y the e n d of 1 988.
however,
the
Total assets,
i n c r e a s e d to $ 1. 4 t r i l l i o n f r o m $ 6 0 4 b i l l i o n o v e r the
same period.
Second,
dominated by stock
the i n d u s t r y h a s i n c r e a s i n g l y b e c o m e
rather than mutual
b e g i n n i n g of the d e c a d e ,
institutions.
o n l y 20 p e r c e n t of a ll t h r i f t s w e r e
s t o c k w i t h 27 p e r c e n t of t o t a l i n d u s t r y a s s e t s .
y e a r - e n d 1 9 88 ,
A t the
However,
by
s u c h t h r i f t s a c c o u n t e d for 44 p e r c e n t of a ll
t h r i f t s w i t h 74 p e r c e n t of all a s s e t s .
Third,
e v e n t h o u g h the
p e r c e n t a g e of f e d e r a l l y c h a r t e r e d t h r i f t s i n c r e a s e d o n l y 8
p e r c e n t a g e p o i n t s to 58 p e r c e n t f r o m 1 9 8 0 to 1988,
assets controlled by these institutions
56 p e r c e n t .
Fourth,
the s h a r e of
r o s e to 71 p e r c e n t f r o m
thrifts have diversified into new
a c t i v i t i e s d u r i n g this period.
T h e s h a r e o f a s s e t s d e v o t e d to
h o m e m o r t g a g e s d e c l i n e d to 39 p e r c e n t in 1 9 8 8 f r o m 67 p e r c e n t in
1 9 80 .
A t t he s a m e time,
the g r o w i n g i m p o r t a n c e of
s e c u r i t i z a t i o n is e v i d e n t .
Whereas thrifts held only 4 percent
o f t h e i r a s s e t s in m o r t g a g e - b a c k e d s e c u r i t i e s
i n c r e a s e d to 15 p e r c e n t b y 1988.
r e c o r d $ 12 b i l l i o n in 1988.
nonoperating factors
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(i.e.,
F if t h ,
in 1980,
the s h a r e
the i n d u s t r y l o s t a
A l l of t h i s l o s s w a s d u e to
a s s e t w r i t e - d o w n s a n d a d d i t i o n s to
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Table 1
U.S. Thrift Industry:
Number of Institutions
Total Assets ($ Billions)
GAAP Net Worth (Millions)
Tangible Net Worth ($ Billions)
Net Income ($ Millions)
Net Operating Income ($ Millions)
Net Nonoperating Income ($ Millions)
Taxes ($ Millions)
Percent
Percent
Total
Percent
of Home Mortgages to Total Assets
of Mortgage Backed Securities to
Assets
of Mortgage Assets to Total Assets
Stock Institutions
(X of Number of Institutions)
(X * / Total Assets)
Federally-Chartered
(X or Number of Institutions)
(X of Total Assets)
1980- 1988
1980
1981
1982
1983
1984
1985
1986
1987
1988
3,993
604
32
32
3,751
640
27
25
3,287
686
20
4
3,144
814
25
4
3,134
978
27
3
3,244
1,070
34
9
3,220
1,164
39
15
3,147
1,251
34
9
2,949
1,352
46
23
(4,631)
(7,114)
964
(1,519)
(4,142)
(8,761)
3,041
(1,578)
1,945
(46)
2,567
576
1,022
990
796
764
3,728
3,601
2,215
2,087
131
4,562
(1,290)
3,141
66.5
" 4578
56.3
49.4
44.#
42.4
38.#
it.6
38.6
4.4
70.8
5.0
70.1
8.6
64.9
10.9
60.7
11.1
56.0
10.4
52.8
13.1
52.0
15.6
53.4
15.4
53.9
20.0
27.0
21.0
29.0
23.0
30.0
24.0
40.0
30.0
52.0
33.0
56.0
37.0
62.0
40.0
70.0
44.0
74.0
50.0
56.0
51.0
63.0
51.0
70.0
51.0
66.0
54.0
64.0
53.0
64.0
54.0
64.0
56.0
65.0
58.0
71.0
43
0.4
0
87
14
(0.35)
237
64
(5)
293
79
(6)
445
110
(6)
470
131
(9)
471
126
(13)
520
183
(24)
364
114
(16)
287
38
1
690
146
3
929
241
(3)
933
263
(3)
911
380
(3)
719
293
(1)
544
367
(1)
434
230
(1)
392
316
1
781
790
398
407
(7,779) (12,057)
2,850
907
(7,930) (11,012)
2,699
1,952
GAAP Capital-to-Asset Ratio
< OX
Number
Tt al Assets ($ Billions)
Tangible Net Worth ($ Billions)
OX to 3X
Number
Total Assets ($ Billions)
Tangible Net Worth ($ Billions)
3X to 6X
Number
Total Assets ($ Billions)
Tangible Net Worth ($ Billions)
> 6%
Number
Total Assets ($ Billions)
Tangible Net Worth ($ Billions)
1,959
383
18
1,801
379
15
1,315
319
6
1,222
382
7
1,092
399
7
1,173
507
9
1,150
541
12
1,002
537
14
968
639
18
1,704
182
14
1,173
101
8
806
62
5
698
90
5
688
88
6
884
139
9
1,055
229
17
1,191
300
20
1,225
282
20
Resolutions
Number
Total Assets ($ Billions)
Estimated Present-Value Cost ($ Millions)
11
1,458
167
28
13,908
759
63
17,662
803
36
4,631
275
22
5,080
743
30
5,601
979
46
12,455
3,065
47
10,660
3,704
205
100,660
31,180
Note: Resolutions do not include 18 “
stabilizations11 in 1988 that had assets of $7,463 million and tangible net worth of
negative $3,348 million, and an estimated present value resolution cost of $6,838 million.
5
Chart 1
GAAP—Solvent & GAAP—Insolvent Thrifts
(1980 - 1988)
N u m b e r of Institutions
GAAP-Insolvent
■Thrifts
4,000
W M GAAP-Solvent
illM Thrifts
3,000
2,000
1,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
Chart 2
Assets of GAAP-Solvent & GAAP-Insolvent Thrifts
(1980 - 1988)
Assets ($ Billions)
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GAAP-Insolvent
Thrifts
GAAP-Solvent
Thrifts
1980
1981
1982
1983
1984
1985
1986
1987
1988
6
loan loss
1981
reserves)
and taxes.
In c o n t r a s t ,
th e h u g e l o s s e s in
a n d 1 9 8 2 w e r e e n t i r e l y d u e to o p e r a t i n g f a c t o r s
negative
i n t e r e s t rate spread).
GAAP-insolvent thrifts
the d e c l i n e ,
S i xt h ,
a
th e n u m b e r of
increased each year until
there were still
(i.e.,
1988.
Despite
364 i n s o l v e n t i n s t i t u t i o n s
o p e r a t i n g w i t h $ 1 1 4 b i l l i o n in a s s e t s at y e a r - e n d .
Th e
e x i s t e n c e of t h e s e i n s t i t u t i o n s as w e l l as h u n d r e d s of o t h e r s
that were
"marginally"
solvent explains why more
d o n e to r e s o l v e t h e t h r i f t c r i s i s .
well-capitalized thrift institutions
capital-to-asset
Finally,
the n u m b e r of
(i.e.,
those with GAAP
ratios exceeding 6 percent)
i n c r e a s i n g s i n c e 1 984.
r e m a i n s to be
A t y e a r - e n d 1988,
has actua l l y been
there were 1,225 such
t h r i f t s w i t h $ 2 8 2 b i l l i o n in a s s e t s a n d $ 20 b i l l i o n in t a n g i b l e
capital.
Thrift Failures and Resolutions
It h a s b e e n w i d e l y r e p o r t e d t h a t h u n d r e d s of t h r i f t
i n s t i t u t i o n s h a v e f a i l e d a n d h a v e b e e n r e s o l v e d b y the F S L I C in
recent years.
It is n o t a l w a y s c l e a r ,
"failure" and "resolution" mean.
however,
w h a t the t e r m s
A r e a s o n a b l e d e f i n i t i o n of
f a i l u r e is w h e n t h e m a r k e t v a l u e of a t h r i f t is n o l o n g e r
positive.
M e a s u r i n g the m a r k e t v a l u e of a t h r i f t is t y p i c a l l y a
d i f f i c u l t a n d c o n t r o v e r s i a l task,
however.
D e s p i t e th e l a c k of i n f o r m a t i o n a v a i l a b l e to a c c u r a t e l y
d e t e r m i n e t he m a r k e t v a l u e of i n d i v i d u a l t h r i f t i n s t i t u t i o n s ,
i n f o r m a t i o n r e g a r d i n g b o o k v a l u e s is r e a d i l y a v a i l a b l e .
knows,
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for e x a m p l e ,
the n u m b e r of t h r i f t s t h a t a r e G A A P
One
7
insolvent.
O n e a l s o k n o w s w h e n the F S L I C h a s t a k e n an a c t i o n
a g a i n s t a n i n s t i t u t i o n a n d w h e t h e r the a c t i o n r e q u i r e d an
e x p e n d i t u r e of f u n ds .
A n a p p r o x i m a t i o n to the n u m b e r of
f a i l u r e s is t h e r e f o r e the i n s t i t u t i o n s a g a i n s t w h i c h the F S L I C
has a l r e a d y taken act i on plus open but G A A P - i n s o l v e n t
institutions.
Table 1 and Charts 3 and 4 contain such
information.
D u r i n g the 1 9 8 0s ,
the F S L I C h a s t a k e n f iv e d i f f e r e n t t y p e s
of a c t i o n s a g a i n s t t r o u b l e d t h r i f t i n s t i t u t i o n s :
liquidation,
(2) a s s i s t e d m e r g e r ,
management consignment program
merger.
Actions
(5)
the F S L IC .
(3) s t a b i l i z a t i o n ,
(MCP),
and
(4)
(5) s u p e r v i s o r y
(1) a n d (2) ar e m e a n t to be f i n a l a n d i m p o s e
c o s t s u p o n the F S L I C .
Action
(1)
T h e s e are r e f e r r e d to as r e s o l u t i o n s .
is a l s o m e a n t to be f i n a l b u t i m p o s e s no c o s t u p o n
Actions
(3) a n d
(4) a re t e m p o r a r y a c t i o n s t h a t w i l l
e v e n t u a l l y l e a d to l i q u i d a t i o n s or m e r g e r s .
F r o m 1 9 8 0 t h r o u g h 1988,
institutions,
the F S L I C l i q u i d a t e d 77
e n g a g e d in 411 a s s i s t e d m e r g e r s ,
stabilizations,
a n d 333 s u p e r v i s o r y m e r g e r s .
p r e s e n t - v a l u e c o s t of the l i q u i d a t i o n s ,
stabilizations
is n e a r l y $5 0 b i l l i o n .
$ 1 8 0 b i l l i o n in a s s e t s .
In 19 8 8 a l o n e ,
77 M CP s,
18
The e s t i m a t e d
assisted mergers,
and
These institutions held
223 t h r i f t s w e r e
r e s o l v e d or s t a b i l i z e d at a n e s t i m a t e d c o s t of $ 38 b i l l i o n .
A l t h o u g h the F S L I C t o o k a c t i o n a g a i n s t a g r e a t e r n u m b e r of
t r o u b l e d t h r i f t s in 1982, m o s t w e r e s u p e r v i s o r y m e r g e r s a n d the
cost was only $803 million.
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
8
Chart 3
Thrift Failures
(1980 - 1988)
N u m b e r of Institutions
700
GAAP—Insolvent
59761
600
484
500
400
48
53 o55
MCPs (Management Consignment
Program) & Stabilizations
Supervisory Mergers
(No Cost)
Liquidations &
Assisted Mergers
$11
363
111
300
200
Ilf!
100
0
Chart 4
Actions Taken by the FSLIC
(1980 - 1988)
N u m b e r of Institutions
300
Supervisory Merg ers
| Stabilizations
250 -
[^Assisted Mergers
200
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
B Liquidations
v# ° ^
^
^
^
9
M a i n l y as a r e s u l t of all the a c t i o n s t a k e n in 1988,
the
n u m b e r of G A A P - i n s o l v e n t i n s t i t u t i o n s d e c l i n e d to 364 f r o m 520
in the p r e v i o u s y e a r .
assets.
These
i n s t i t u t i o n s h e l d $ 1 1 4 b i l l i o n in
Addi n g together GAAP insolvent and other nearly
insolvent institutions,
the B a n k B o a r d on M a r c h 1, 1 9 8 9
i d e n t i f i e d 578 t h r i f t s t h a t w o u l d l i k e l y r e q u i r e
at a n e s t i m a t e d c o s t of $38 b i l l i o n
prompt action,
however,
[see W a l l
future action
(1989)].
Without
t h i s c o s t w a s e x p e c t e d to be p u s h e d
still higher.
Regional Distribution of Thrift Resolution Costs
T a b l e 2 s h o w s t h a t the d i s t r i b u t i o n of t h r i f t
costs,
b o t h a c r o s s the c o u n t r y a n d o v e r time,
resolution
has b e e n quite
uneven.
The cost figures include on l y l i q u i d a t i o n s and ass i s te d
mergers,
o m i t t i n g the $7 b i l l i o n c o s t of the 18 s t a b i l i z a t i o n s
in 1 988.
Clearly,
T e x a s h a s a c c o u n t e d b y far for the l a r g e s t
s h a r e — a b o u t h a l f — of the t o t a l c o s t of al l
1 98 0 t h r o u g h 1988.
California,
Florida,
resolutions from
and Illinois account
f or a b o u t a n o t h e r o n e - f o u r t h of the t o t a l cost.
This
i n f o r m a t i o n h a s l e d s o m e to a r g u e t h a t t he t a x b u r d e n of
r e s o l v i n g the t h r i f t c r i s i s s h o u l d r e f l e c t th e r e g i o n a l
d i s t r i b u t i o n o f th e r e s o l u t i o n cost.
T h e e x t e n t to w h i c h the h u g e c o s t s i n c u r r e d in 19 8 8 are
e m b e d d e d losses from actions taken by thrifts y e a r s earlier will
be d i s c u s s e d b e l o w .
Digitized for FRASER
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Federal Reserve Bank of St. Louis
T h i s d i s c u s s i o n w i l l d e m o n s t r a t e t h a t one
Table 2
Estimated Resolution Cost of FSLIC-Resolutions by State
($ Millions)
1980
1981
1982
1983
1984
1985
Alaska
Alabama
Arkansas
California
Colorado
District of Columbia
Florida
Georgia
Hawaii
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
North Dakota
Nebraska
New Jersey
New Mexico
Nevada
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
West Virginia
Wyoming
0
0
0
0
0
0
15
0
1
3
0
17
0
0
0
0
0
0
11
0
0
0
0
0
0
0
10
2
0
0
104
0
0
0
0
3
0
0
0
0
0
0
0
0
0
0
3
0
0
0
0
3
33
0
0
0
0
76
0
0
0
0
0
24
0
95
51
0
0
5
13
0
9
0
0
361
0
0
0
0
84
0
0
0
0
1
0
0
0
0
0
0
0
0
0
3
0
0
16
2
0
0
0
354
0
3
8
3
51
10
0
0
1
1
5
0
4
0
21
2
0
211
0
0
0
11
7
0
0
0
0
78
0
14
0
0
0
0
0
3
0
0
0
0
0
0
0
9
0
32
38
0
0
21
0
0
16
1
77
0
0
0
0
0
0
6
0
13
27
0
0
13
0
0
0
4
0
0
0
12
0
3
0
0
0
0
0
330
0
0
0
0
0
0
0
80
164
0
1
0
0
0
0
0
0
82
8
22
62
15
0
3
10
0
3
0
8
16
65
0
0
0
0
0
3
5
0
0
0
0
5
0
0
2
0
146
0
0
0
0
0
17
155
163
18
174
0
0
'0
Year Total
167
759
803
275
743
979
State
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
0
0
37
0
0
0
4
0
21
0
0
0
8
0
0
39
0
16
0
0
4
28
0
0
0
1
10
1986
4
0
657
159
36
0
701
0
0
0
0
16
0
7
93
418
0
0
13
0
75
0
0
0
0
0
0
2
0
59
222
71
21
0
0
0
0
0
0
493
0
0
(13)
0
0
30
3,065
1987
1988
State Toi
2
0
90
715
0
0
0
0
0
102
121
173
0
20
0
539
0
69
14
0
100
0
0
0
0
5
55
0
0
0
22
41
27
0
0
0
0
0
0
1,504
46
35
22
0
0
0
0
13
28
5,439
515
0
1,315
5
0
327
2
1,379
152
20
84
177
0
0
175
205
0
0
11
34
0
0
233
84
0
0
478
744
362
0
0
0
0
8
34
18,614
0
136
92
0
81
147
9
16
858
6,654
573
65
2,095
7
4
451
123
2,087
190
58
201
1,226
51
125
229
301
303
12
21
39
56
5
345
100
0
648
884
857
556
23
92
13
0
12
131
21,010
209
215
274
3
81
177
3,704
30,894
41,388
11
cannot c o n c lu d e that beca u s e
w e r e i n c u r r e d in 1988,
r o u g h l y 80 p e r c e n t of the c o s t s
the t h r i f t p r o b l e m is a v e r y r e c e n t
problem.
Comparison of Thrift Failures of the 1930s and 1980s
It is u s e f u l to c o m p a r e the t h r i f t c r i s i s of the 1 9 8 0 s w i t h
the p r o b l e m s e x p e r i e n c e d b y t h r i f t s d u r i n g the G r e a t D e p r e s s i o n .
C h a r t s 5 a n d 6 d o t h i s b y c o m p a r i n g the rate of t h r i f t f a i l u r e s
for the t w o p e r i o d s as w e l l as the c o s t s a s s o c i a t e d w i t h the
failures.
A s C h a r t 5 show s,
the f a i l u r e
ra t e for t h r i f t s in
r e c e n t y e a r s h a s e x c e e d e d t h a t for t h r i f t s d u r i n g the 1 93 0s .
Chart 6 shows that FSLIC's losses
assets
1 9 3 0s .
r e l a t i v e to t o t a l
industry
in 1 9 8 8 w e r e far g r e a t e r t h a n in a n y y e a r d u r i n g the
T h e c r i s i s in the 1 9 8 0 s ,
generated
in o t h e r w o r d s ,
has a l re a d y
relatively greater failures and failure costs with
f e d e r a l d e p o s i t i n s u r a n c e t h a n w i t h o u t it d u r i n g the G r e a t
Depression.
CAUSES OF THE THRIFT CRISIS
In t h i s s e c t i o n w e i d e n t i f y s i x f a c t o r s t h a t h a v e c a u s e d
the t h r i f t c r i s i s .
O n l y b y i d e n t i f y i n g a n d u n d e r s t a n d i n g the
causes can one p r o p e r l y d e t e r m i n e
the r e f o r m s n e c e s s a r y to be
sure a s i m i l a r s i t u a t i o n ne v e r ag a i n o c c u r s
Bradley
Kane
Digitized for FRASER
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Federal Reserve Bank of St. Louis
(1989),
(1989),
Brumbaugh
Scott
(1988)
(1 988),
Carron
[also,
(1988)
and Strunk and Case
see B a r t h a n d
Horvitz
(1988)].
(1989),
12
Chart 5
Ratio of Thrift Failures to All Thrifts
Percent
1930's
1980's
1980
1981
1982
1983
1984
1985
Year
1986
1987
1988
Sources: Barth and Regalia (1988), Barth and Bradley (1989) and Barth,
Feid, Reidel, and Tunis (1989).
Chart 6
Ratio of Losses of Failed Thrifts to
Total Assets
Percent
1930's
1980’
s
Sources: Barth and Regalia (1988), Barth and Bradley (1989) and Barth,
Feid, Reidel, and Tunis (1989).
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Federal Reserve Bank of St. Louis
13
A Rigid Institutional Design
S i n c e t h e i r o r i g i n in 1831,
t h r i f t s h a v e c o n c e n t r a t e d on
g a t h e r i n g s a v i n g s d e p o s i t s a n d p r o v i d i n g h o m e m o r t g a g e l oa ns .
I n f o r m a t i o n o n t he c o m p o s i t i o n tif a s s e t s a n d l i a b i l i t i e s o v e r
the p e r i o d 19 7 9 to 1 98 8 is p r o v i d e d in T a b l e
recently,
thrifts
3.
Until very
r e l i e d h e a v i l y on s a v i n g s d e p o s i t s a n d
i n v e s t e d a l a r g e s h a r e of t h e i r a s s e t s in t r a d i t i o n a l h o m e
mortgages
[see W e i c h e r
(1988)].
But these p ortfolio decisions
have not been entirely voluntary,
for t h r i f t s h a v e b e e n
s u b j e c t e d to n u m e r o u s r e g u l a t o r y c o n s t r a i n t s o n t h e i r a s s e t a n d
liability holdings.
regulations
flexible
branch,
Furthermore,
t h r i f t s h a v e b e e n s u b j e c t e d to
r e g a r d i n g the t y p e s of m o r t g a g e s
rate)
they could provide,
the a r e a s
(e.g.,
f i x e d vs.
in w h i c h t h e y c o u l d
t he r a t e of i n t e r e s t t h e y c o u l d o f f e r on d e p o s i t s ,
and
the e x t e n t to w h i c h t h e y c o u l d e n g a g e in o p t i o n s a n d f u t u r e s
activities.
P r i o r to the 198 0s ,
t h r i f t i n s t i t u t i o n s s p e c i a l i z e d in
g a t h e r i n g d e p o s i t s to f u n d h o m e m o r t g a g e s .
R e g u l a t o r y a n d tax
f a c t o r s e n c o u r a g e d if n o t r e q u i r e d s u c h s p e c i a l i z a t i o n .
income was,
therefore,
Thrift
b a s e d m a i n l y o n the a m o u n t b y w h i c h the
i n t e r e s t r a t e o n h o m e m o r t g a g e s e x c e e d e d the i n t e r e s t rate on
deposits,
net of general and a d m i n i s t r a t i v e expenses.
fixed mortgage
r at e a n d a v a r i a b l e d e p o s i t ra t e a n d the s t a g e is
s e t for a c r i s i s in an u n e x p e c t e d l y h i g h a n d v o l a t i l e
rat e e n v i r o n m e n t .
T hus,
interest
a c a u s e of the c u r r e n t t h r i f t c r i s i s is
a rigid institutional design.
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Federal Reserve Bank of St. Louis
Add a
TABLE 3
T H R I F T IMDCISTRY
COMPOSITION OF GHOSS ASSETS. LIABILITIES - A N D CAPITAL OF ALL THRIFTS
(P E R C E B T O F A S S E T S )
December
1979
1980
1981
1983
198 2
1984
1985
1986
1987
1988
ASSETS
Mortgage-Backed Securities
Home Mortgages
Subtotal
3.5
4.4
5.0
8.6
10.9
11.1
10.4
13.1
15.6
68.0
66.5
65.0
56.3
49.8
44 .9
42.4
38.9
37.8
38.6
71. 5
70.8
70.1
6 4.9
60.7
56.0
52.8
52.0
53.4
53.9
15.4
Multifaaily
6.4
6.0
5.6
5.6
6.0
6.4
6.9
6.8
6.6
6.2
Mortgages on C o a a e r c i a l Real Estate
6.6
6.3
6.2
6.4
7.3
8.4
9.2
8.7
8.3
7.7
M o r t g a g e s for L a n d fc L a n d D e v e l o p m e n t
0.9
0.9
0.9
1.0
1.5
2.3
2.9
2.6
2.1
1.8
Nonmor t g a g e C o a a e r c i a l Loans
0.2
0.3
0.1
0.1
0.4
1.2
1.5
1.9
1.8
2.4
4.4
Nonaortgage Consumer Loans
2.6
2.7
2.7
2.8
3.0
3.4
4.1
4.2
4.4
Repossessed Assets
0.1
0.2
0.2
0.4
0.5
0.5
0.9
1.3
2.0
2.1
Investment Real Estate
0.2
0.2
0.3
0.4
0.5
0.5
0.6
0.7
0.7
0.5
12.9
13.4
12.9
13.7
13.1
13.5
1.2
1.1
1 .1
• 1.1 -
1.1
1-0
8.1
9.1
9.4
11.4
' 1.3
1.3
1.4
1.3
E q u i t y in S e r v i c e C o r p s . / S u b s i d i a r i e s
0.4
0.5
0.6
0.8
1.0
1.6
1 .9
1.7
1.7
1.7
Goodwill
0.0
0.0
0.3
2.3
2.6
2.3
2.2
2.0
1.9
1.7
Other
1.7
1.7
2.1
2.7
2.5
2.8
3.0
3.1
2.9
3.1
81.1
81.1
78.8
77.6
78.6
77.1
75.9
73.9
71.9
69.8
10.1
71.0
6.6
74.5
7.4
71.4
8.3
69.4
10.4
68.2
11.1
65.9
9.8
66.2
9.7
64.2
9.6
62.3
9.3
60.5
0.3
0.6
0.5
1.1
3.5
4.2
3.7
3.7
4.9
5.1
FHLBank Advances
7.1
7.6
9.6
9.0
6.7
7.0
7.6
8.3
9.0
9.6
Other B o rrowed Money — Total
2.6
2.8
4.1
4.8
4.8
6.5
6.6
8.0
10.3
11.9
1.1
0.6
0.9
1.4
0.6
0.8
1.4
0.5
2.2
1.7
0 .5
2.7
2.7
0.4
1.7
4.5
0.5
1.5
4.0
0.8
1.8
4.9
1.0
2.1
6.5
1.2
2.5
7.1
1.3
3.5
3.6
3.2
3.2
5.0
6.0
5.7
5.7
5.4
4.9
4.3
Regulatory Capital
5.6
5.3
4.3
3.6
3.9
3.7
4.2
4.4
3.9
4.4
GAAP Capital
5.6
5.3
4.2
2.9
3.0
2.6
3.0
3.2
2.6
3.3
Tangible Capital
5.6
5.2
3.9
0.5
0.4
0.3
0.7
1.2
0.7
1.7
Cash, D e p o s i t s a n d S e c u r i t i e s
Fixed Assets
*
LIABILITIES
D e p o s i t s — Total.
More than $100,000
$ 1 0 0 , 0 0 0 or L e s s
Broker O r ig i n a t e d Deposits
( i n c l u d e d in t o t a l )
Reverse Repurchases
M ortgage Back ed Securities Issued
Other Borrowings
Other Liabilities
CAPITAL
Total Assets
( B i l l i o n s of D o l l a r s )
N u a b e r of I n s t i t u t i o n s
Digitized for FRASER
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Federal Reserve Bank of St. Louis
567
604
640
686
814
978
1,070
1,164
1,251
1 ,352
4,038
3,993
3,751
3,2 8 7
3,146
3,136
3 ,246
3,220
3,147
2, 9 4 9
15
High and Volatile Interest Rates
In the l a t e 1 9 7 0 s a n d e a r l y 1 9 8 0 s i n t e r e s t
r a t e s rose to
u n e x p e c t e d l y high levels and became e xtremely volatile.
C o n t r i b u t i n g to the f l u c t u a t i o n s in n o m i n a l
interest
rates were
i n f l a t i o n a r y e x p e c t a t i o n s a n d a c t i o n s t a k e n b y the F e d e r a l
Reserve Board.
These movements
affected thrift institutions.
in i n t e r e s t r a t e s s e v e r e l y
C h a r t 7 s h o w s t h a t as i n t e r e s t
r a t e s p e a k e d in t he e a r l y 1 9 80 s,
thrifts plummeted.
Indeed,
the n e t o p e r a t i n g i n c o m e of
85 p e r c e n t of a l l t h r i f t s w e r e
unprofitable in 19 8 1 a n d m o s t w e r e i n s o l v e n t if o n e h a d
"marked-to-market"
As interest
I
their fixed-rate m o rtgage loan portfolios.
rates declined,
net operating income and "market
values"
improved.
With liabilities
repricing more q u i c k l y than
assets,
s h a r p a n d p r o l o n g e d i n c r e a s e s in i n t e r e s t r a t e s ca n
clearly devastate thrifts.
Th us ,
a c a u s e of the c u r r e n t t h r i f t
c r i s i s is h i g h a n d v o l a t i l e
i n t e r e s t r ates.
Deterioration in Asset Quality
W h e r e a s p r o b l e m s in th e e a r l y 1 9 8 0 s w e r e m a i n l y i n t e r e s t ra t e r e l a t e d ,
asset quality.
t h e p r o b l e m s in m o r e r e c e n t y e a r s w e r e m a i n l y
S i n c e T e x a s a c c o u n t s for s u c h a l a r g e s h a r e of
the r e s o l u t i o n c o s t s in 1988,
it is u s e f u l to e x a m i n e ne t
n o n o p e r a t i n g i n c o m e for t h r i f t s in t h i s s t a t e .
Chart 7 shows
t h a t n e t n o n o p e r a t i n g l o s s e s for t h r i f t s in b o t h T e x a s a n d the
U.S.
track one another quite closely from 1985 onwards.
surprisingly,
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Not
there has been a h e a v y c o n c e n t r a t i o n of total
C h a r t
7
Net Operating Income vs. Net Nonoperating Income
(1080 - 1988)
($ Millions)
4.000
4.000
2.000
2.000
»
v^/
\
0
o
fo t Operating Income
U.S.
Net Nonoperating Income
U.S.
...........
Net Operating Income vs. 3 Month Treasury Bill Rate
(1980 - 1988)
Net Operating Income ($ Millions)
4.000
T-Bill Rate (Percent)
Net Operating Income
2.000
3 Mo. Treasury
Bill Rate
0
\
(2.000)
(2.000)
(4,000)
%
\
(0.000)
(•.000) _1__ 1__ 1___1----1---- 1___1__ 1----1---- L.— 1
1
•
(2.000)
1
\
*I
« •
* ■(4.000)
(A.OOO)
1 —1.... i ■■■■1— 1-----1— (8.000)
(4.000)
(0.000)
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
Oil and Gas Extraction Index
*,
J
\ /
x"
tp-tp- tyV* tP't?^tf>-1?^t^V^tFtP^trtr^
Texas Net Nonoperating Income vs. Texas Oil and Gas Extraction
(1980 - 1988)
Net Nonoperating Income ($ Millions)
\
^^ ^i* *v**
Net Nonoperating Income: U.S. vs. Texas
(1980 - 1988)
($ Millions)
0\
17
industry losses among thrifts
in T e x a s
in r e c e n t y e a r s ,
and most
of t h e s e l o s s e s h a v e b e e n d u e to a s s e t w r i t e - d o w n s a n d a d d i t i o n s
to l o a n l o s s r e s e r v e s .
P l u n g i n g oil p r i c e s a n d real e s t a t e
v a l u e s c o n t r i b u t e d to the s h a r p d e t e r i o r a t i o n in a s s e t q u a l i t y
at T e x a s t h r i f t s .
Thus,
a c a u s e of the c u r r e n t t h r i f t c r i s i s is
a d e t e r i o r a t i o n in a s s e t q u a l i t y .
Federal and State Deregulation
Thrift institutions have been
h e a v i l y r e g u l a t e d for y e a r s .
S u c h r e g u l a t i o n u n d o u b t e d l y g e n e r a t e d m o n o p o l y r e n t s a n d t hu s
e n h a n c e d the m a r k e t v a l u e of t h r i f t s .
B u t it a l s o m a d e t h r i f t s ,
with their
vulnerable
rigid institutional design,
to
u n a n t i c i p a t e d c h a n g e s in e c o n o m i c c o n d i t i o n s a n d to
technological developments.
state-chartered,
regulation.
Being both federally and
t h r i f t s a re s u b j e c t to b o t h f e d e r a l a n d s t a t e
The Congr e s s can l e gi slate
r e q u i r e d r u l e s of
b e h a v i o r for t h r i f t s as w e l l as the f e d e r a l
t h r i f t s — the B a n k B o a r d .
t he C o n g r e s s ,
r e g u l a t o r of
W i t h i n the g u i d e l i n e s e s t a b l i s h e d by
th e B a n k B o a r d c a n t h e n v a r y the r e g u l a t o r y
t r e a t m e n t of t h r i f t s w i t h r e s p e c t to c e r t a i n a c t i v i t i e s .
Thus,
r e g u l a t i o n o f t h r i f t s is the r e s p o n s i b i l i t y of the C o n g r e s s ,
Bank Board,
a n d th e s t a t e s t h a t c h a r t e r t h r i f t
In 1 9 8 0 a n d t h e n a g a i n in 1982,
institutions.
the C o n g r e s s p a s s e d m a j o r
legislation that gave federally chartered thrift institutions
new and expanded powers.
State authorities generally granted
s i m i l a r or e v e n b r o a d e r p o w e r s to s t a t e - c h a r t e r e d t h r i f t s ,
such powers had not already been granted.
Digitized for FRASER
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Federal Reserve Bank of St. Louis
the
Table 4 presents
if
Table 4
Restrictions on Thrift Asset Powers
As of December 1987 and December 1988
(Percent of Assets)
All Thrifts
Federal
Restrictions
California
Restrictions
Texas
Federally
Chartered
StateChartered
Actual
Holdings
StateChartered
1987 1988
1987 1988
1987 1988
Actual Holdings
Restrictions
Florida
Actual
Holdings
StateChartered
Restrictions
1987 1988
Actual
Holdings
StateChartered
1987 1988
Consumer Non-Mortgage loans
30
4.6
4.4
3.5
3.9
30
2.4
2.8
Unlimited
3.0
2.9
b/
4.7
6.1
Commercial Non-Mortgage Loans
10
1.8
2.5
2.0
2.3
10
2.2
2.9
Unlimited
2.3
2.8
b/
3.0
2.9
Commercial Real Estate Loans
40
8.4
7.8
9.0
8.0
40
9.2
8.8
Unlimited
10.1
8.3
b/
8.8
6.8
Education Loans
5
0.4
0.3
0.2
0.2
a/
0.0
0.0
Unlimited
0.1
0.2
b/
0.7
0.5
Service Corporations
3
1.2
1.2
3.0
3.0
c/
3.0
4.1
d/
5.1
4.4
20
4.5
2.9
e/
0.2
0.3
1.3
1.0
e/
1.2
0.8
e/
3.3
2.9
e/
0.3
0.3
137
127
211
147
58
53
144
119
82
58
29
33
Equity Risk Investment
Total Number of Thrifts
Total Assets ($ billions)
a/
b/
c/
d/
e/
1,768 1,720
814
965
1,379 1,229
437
389
Included in consumer non-mortgage loan limit.
Any association may make a secured or unsecured loan to any person subject to the requirement that 60% of assets be invested in residential real estate loans,
All service corporation activity requires prior approval from the respective state banking authority,
This limitation may be exceeded with the approval of the respective state banking authority.
Equity risk investment limitations apply to all federally insured thrifts. For thrifts that are in compliance with capital requirements
(i.e., tangible capital to assets > 6%), equity risk investments may be made to a limit of 3 times tangible capital. If the thrift is in compliance with
minimum capital requirements and less than 6X, the limitation is the greater of 3% of assets or 2.5 times tangible capital. If the thrift does not meet
minimum capital requirements, all equjty risk investments require prior approval from the supervisory agent.
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Federal Reserve Bank of St. Louis
19
i n f o r m a t i o n on so m e of the p o w e r s a v a i l a b l e to f e d e r a l l y
c h a r t e r e d t h r i f t s as w e l l as s t a t e - c h a r t e r e d t h r i f t s
states.
in s e l e c t e d
I n f o r m a t i o n r e g a r d i n g the e x t e n t to w h i c h t h e s e p o w e r s
h a v e b e e n u s e d is a l s o p r e s e n t e d .
A l t h o u g h these ex pa n d e d
p o w e r s e n a b l e t h r i f t s to s ee k a d d i t i o n a l s o u r c e s of p r o f i t and
greater
risk d i v e r s i f i c a t i o n ,
they also enable
t h r i f t s to se ek
higher profits through riskier activities.
O n e w o u l d e x p e c t d e r e g u l a t i o n to l e a d to g r e a t e r
c ompetition among thrift institutions and other financial
service
f i rm s.
therefore,
T h e l e g i s l a t i o n p a s s e d in 1 9 8 0 a n d 1 9 8 2 s h o u l d ,
h a v e l e d to a d d i t i o n a l t h r i f t f a i l u r e s .
e x t e n t t h a t the c a s u a l t i e s of the d e r e g u l a t i o n w e r e
institutions,
inefficient
one should not argue against deregulation.
make matters worse,
was
T o the
To
the r i g i d i n s t i t u t i o n a l d e s i g n of t h r i f t s
i n a d e q u a t e to c o p e w i t h the g r e a t e r c o m p e t i t i o n f o s t e r e d b y
s e c u r i t i z a t i o n and, m o r e g e n e r a l l y ,
the r a p i d l y e v o l v i n g
information technologies.
By permitting more competition,
therefore,
d e r e g u l a t i o n can,
l e a d to an i n c r e a s e in t h r i f t f a i l u r e s .
However,
it
c a n a l s o p r o v i d e t h r i f t s w i t h m o r e o p p o r t u n i t i e s to e n g a g e in
r i s k i e r a c t i v i t i e s in s e a r c h of h i g h e r p r o f i t s .
t h e s e r i s k i e r a c t i v i t i e s c a n l e a d to s t i l l m o r e
If p u r s u e d ,
failures.
This
means that w h e n federally insured d e p o s i t s — under a flat-rate
p r e m i u m s t r u c t u r e — ar e b e i n g u s e d to f u n d n e w a c t i v i t i e s ,
regulator must monitor and supervise these activities.
i n a p p r o p r i a t e p r a c t i c e s are detected,
taken by regulators.
Digitized for FRASER
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Federal Reserve Bank of St. Louis
the
If
c o r r e c t i v e s t e p s m u s t be
20
T h e B a n k B o a r d d i d i n d e e d ta k e c o r r e c t i v e s t e p s a g a i n s t a
n u m b e r of t h r i f t s d u r i n g the 1 9 8 0s .
As Chart 8 indicates,
the
n u m b e r of f o r m a l e n f o r c e m e n t a c t i o n s i n c r e a s e d d r a m a t i c a l l y
b e t w e e n 1 9 8 0 a n d 1988.
consent-merger
Th e n u m b e r of s u p e r v i s o r y a g r e e m e n t s a n d
resolutions
s t a r t e d to d e c l i n e a f t e r 1 9 8 6 as
t r o u b l e d t h r i f t s w e r e p l a c e d in the m a n a g e m e n t c o n s i g n m e n t
p r o g r a m or r e s o l v e d .
In a d d i t i o n ,
a n u m b e r of " i n f o r m a l "
a c t i o n s w e r e a l s o t a k e n d u r i n g the p e r i o d .
h a s b e e n the t r a d i t i o n a l
While moral
suasion
s u p e r v i s o r y t o o l of the B a n k B o a r d ,
the
n e e d for s u p e r v i s o r y a c t i o n is i l l u s t r a t e d b y th e n u m b e r of
formal enforcement actions that were taken against troubled
t hri f t s .
W h i l e t he n e e d for e x a m i n a t i o n a n d s u p e r v i s i o n is i n c r e a s e d
in an i n c r e a s i n g l y c o m p e t i t i v e a n d d e r e g u l a t e d e n v i r o n m e n t ,
C h a r t 9 s h o w s t h a t the e x a m i n a t i o n s t a f f a n d b u d g e t f a i l e d to
k e e p p a c e w i t h the g r o w t h in t o t a l i n d u s t r y a s s e t s a n d the e n t r y
into new activities.
H i g h l y t r a i n e d a n d w e l l - p a i d e x a m i n e r s a re
not made obsolete by deregulation,
but rather become
i n d i s p e n s a b l e as c o m p e t i t i o n h e a t s u p a n d c a p i t a l
is e r o d e d
a w a y — w h i c h is th e b u f f e r to p r o t e c t t h e i n s u r e r a n d t he f u n d s
at r is k b y t he o w n e r s to c o n t a i n t h e i r p r o c l i v i t y t o w a r d risk.
In sum, w i t h o u t a d e q u a t e s a f e g u a r d s ,
federal and state
d e r e g u l a t i o n is a c a u s e of t h e c u r r e n t t h r i f t c r i s i s .
Fraudulent Practices
T h r i f t i n s t i t u t i o n s c a n f ai l t h r o u g h f r a u d a n d
m i s m a n a g e m e n t b y the m a n a g e m e n t or o w n e r s .
Digitized for FRASER
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Federal Reserve Bank of St. Louis
Although difficult
Chart 8
E n f o r c e m e n t
A c t i o n s
B a n k
N u m b e r
Digitized for FRASER
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Federal Reserve Bank of St. Louis
o f
o f
B o a r d
t h e
i n
F e d e r a l
t h e
H o m e
L o a n
1 9 8 0 s .
A c t i o n s
250
Cease—and—Desist
Orders
Individuals
Removed
Supervisory
Agreements
Consent-Merger
Resolutions
200
150
100
50
0
JXL
1980
1981
1982
1983
1984
Y e a r
1985
1986
1987
1988
22
Chart 9
Examination Staff vs. Industry Assets
Number
($ Millions)
Year
Examination Budget vs. Industry Assets
($ Millions)
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
($ Millions)
Year
23
to d e t e c t ex a nt e,
10 p r e s e n t s
t h e s e f a c t o r s are a s o u r c e of t r o u b l e .
i n f o r m a t i o n on s i g n i f i c a n t c r i m i n a l c o n v i c t i o n s
a s s ociated with failed thrifts.
practices have
the F S L I C
Chart
A s m a y be seen,
fraudulent
i n c r e a s i n g l y p l a y e d a r ole in t h r i f t s
[also,
see B a r t h o l o m e w
(1989)].
r e s olved by
It is for t h i s
reason
t h a t f r a u d u l e n t p r a c t i c e s ar e c o n s i d e r e d to be a c a u s e of the
current thrift crisis.
Federal Deposit Insurance:
Moral Hazard
F e d e r a l d e p o s i t i n s u r a n c e w a s e s t a b l i s h e d in r e s p o n s e to
the w i d e s p r e a d f a i l u r e of b a n k s a n d t h r i f t s d u r i n g the G r e a t
Depression.
Without
w i t h d r a w their
insolvent.
insurance,
d e p o s i t o r s w i l l a t t e m p t to
f u n d s w h e n e v e r t h e y b e l i e v e a b a n k or t h r i f t is
Such withdrawals,
however,
m i g h t n o t be r e s t r i c t e d
to i n s o l v e n t i n s t i t u t i o n s b u t i n s t e a d s p r e a d to s o l v e n t
institutions
(i.e.,
deposit insurance
a contagion).
is that,
The b e n e f i t of f e d e r a l
if s u c c e s s f u l ,
it p r o v i d e s
sufficient
c o n f i d e n c e so t h a t d e p o s i t o r s w i l l n e v e r e n g a g e in a " w i d e s p r e a d
run" on d e p o s i t o r y i n s t i t u t i o n s
Eng la nd (1989)].
However,
[see, h o w e v e r ,
E l y (1989)
t h i s b e n e f i t c o m e s at a c os t.
d e p o s i t o r f u n d s a r e sa f e a n d sound,
therefore,
Since
d e p o s i t o r s do not have any
i n c e n t i v e to i m p o s e d i s c i p l i n e on the u s e of t h e i r
institution,
and
funds .
c a n u s e the d e p o s i t s to e n g a g e
r i s k i e r a c t i v i t i e s t h a n w o u l d o t h e r w i s e be p o s s i b l e .
The
in
Th e
role
of the i n s u r e r or r e g u l a t o r is to c o n t a i n t h i s " m o r a l h a z a r d "
p r o b l e m b y m i m i c k i n g the m a r k e t
r i s k w o u l d do).
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
(i.e., d o i n g w h a t d e p o s i t o r s at
To the e x t e n t t ha t the r e g u l a t o r d o e s n o t
C h a r t
1 0
S ig n ific a n t Criminal Convictions A ssociated
With Thrift In stitu tio n s
( 1 9 8 3
-
1 9 8 8 )
N u m b e r
8 0
6 0
4 0
20
6
8
0
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
Y e a r
1 9 8 7
1 9 8 8
25
properly control
institutions,
the i n c r e a s e d r i s k - t a k i n g b e h a v i o r of
t h e r e c a n be m o r e f a i l u r e s a n d g r e a t e r f a i l u r e
c o s t s t h a n w o u l d be p o s s i b l e w i t h o u t d e p o s i t
Furthermore,
insurance.
as s h o w n m o s t r e c e n t l y b y K e e l e y a n d F u r l o n g
(forthcoming)
and Furlong and Keeley (forthcoming),
the i n s u r a n c e to the t h r i f t i n s t i t u t i o n a n d h e n c e
the v a l u e of
its p r o c l i v i t y
t b w a r d r i s k - t a k i n g b e h a v i o r v a r i e s i n v e r s e l y w i t h the a m o u n t of
c a p i t a l at risk.
T h i s m e a n s t ha t e v e n if o t h e r
t h r i f t s to b e c a m e
i n s o l v e n t or n e a r l y i n s o l v e n t ,
factors cause
deposit
i n s u r a n c e w i l l p e r m i t s u c h t h r i f t s to r e t a i n a c c e s s to f u n d s an d
thus remain open.
crucial,
argued,
The regulators'
as B e n s t o n a n d K a u f m a n
"closure
(1988)
is
in e n s u r i n g t h a t i n s t i t u t i o n s d o n o t " g a m b l e for
Without timely
the o u t c o m e m a y be e v e n g r e a t e r n e g a t i v e n e t w o r t h .
Horvitz and Pettit
still
therefore,
have most forcibly
r e s u r r e c t i o n " w i t h i n s u r e d d e p o s i t o r f u n ds .
closure,
rule,"
(1981,
relevant article,
p.
As
56) p o i n t e d o u t in an e a r l y bu t
"the l o n g e r a n i n s t i t u t i o n l o s i n g m o n e y
is a l l o w e d to c o n t i n u e in o p e r a t i o n ,
c o s t to the i n s u r a n c e f u n d . "
In sum,
the g r e a t e r the u l t i m a t e
federal deposit insurance
is a c a u s e of t h e c u r r e n t t h r i f t c r i s i s .
SORTING THROUGH THE EVIDENCE
A l l of t h e f a c t o r s i d e n t i f i e d in the p r e v i o u s s e c t i o n ,
o n e w a y or a n o t h e r ,
c a u s e d t he t h r i f t c r i s i s of the 1 9 8 0 s .
in
This
s e c t i o n f o c u s e s o n th e s p e c i f i c role p l a y e d b y f e d e r a l d e p o s i t
insurance.
with federal
Digitized for FRASER
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Federal Reserve Bank of St. Louis
As a l r e a d y noted, depositor di s c i p l i n e
insurance,
is a b s e n t
w h i c h w a s r a i s e d b y t he C o n g r e s s to
$ 1 0 0 , 0 0 0 f r o m $ 4 0 , 0 0 0 p e r a c c o u n t in 1980.
T h e i n s u r e r or
r e g u l a t o r m u s t t h e r e f o r e i m p o s e a n y n e e d e d d i s c i p l i n e on
thrifts.
A n a t t e m p t w i l l be m a d e to a s s e s s the e x t e n t to w h i c h
i n s u f f i c i e n t d i s c i p l i n e b y the r e g u l a t o r — the B a n k B o a r d ,
Congress,
a n d the s t a t e s — c a u s e d the c r i s i s to be w o r s e
the
than
otherwise.
Required Capital Levels
T a b l e 1 a n d C h a r t 11 p r e s e n t i n f o r m a t i o n o n the n u m b e r of
t h r i f t s a n d t h e i r a s s e t s for v a r i o u s l e v e l s of c a p i t a l i z a t i o n as
w e l l as i n f o r m a t i o n o n a l t e r n a t i v e m e a s u r e s of c a p i t a l
thrifts.
R e g a r d l e s s of the m e a s u r e u s e d ,
of c a p i t a l d u r i n g the e a r l y 1 9 80 s.
required capital levels were
for all
t h e r e w a s an e r o s i o n
D e s p i t e this situation,
r e d u c e d — f r o m 5 to 4 p e r c e n t
N o v e m b e r 1980 and then further
in
r e d u c e d to 3 p e r c e n t in J a n u a r y
!1 9 8 2 — a n d the i t e m s c o u n t i n g as c a p i t a l w e r e b r o a d e n e d t h r o u g h
the u s e of r e g u l a t o r y a c c o u n t i n g p r a c t i c e s
l e s s c a p i t a l at risk,
(RAP).
a thrift has a grea t e r
However,
with
i n c e n t i v e to e n g a g e
in r i s k i e r a c t i v i t i e s f u n d e d b y i n s u r e d d e p o s i t s ,
especially
with a flat-rate insurance premium and a relatively
risk-insensitive capital
requirement.
Delay in Closing Insolvent Thrifts
W h e n t h r i f t s a r e i n s o l v e n t t h e y s h o u l d be c l o s e d
l i q u i d a t e d or m e r g e d ) .
Yet,
y e a r - e n d 1988 but still open.
364 t h r i f t s w e r e i n s o l v e n t at
Furthermore,
as C h a r t 12 sh o ws ,
m a n y of t h e s e t h r i f t s h a d b e e n i n s o l v e n t for y e a r s .
Digitized for FRASER
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Federal Reserve Bank of St. Louis
(i.e.,
Indeed,
Chart 11
A m o u n t
o f
T h r i f t
C a p i t a l
U s i n g
A l t e r n a t i v e
M e a s u r e s
(1980 - 1988)
( $
B i l l i o n s )
1980
1981
1982
1983
1984
1985
Y e a r
Note:
Digitized for FRASER
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Federal Reserve Bank of St. Louis
R = Regulatory Accounting Practices
G = Generally Accepted Accounting Principles
T = Tangible Capital
1986
1987
1988
28
C h a rt 12
Length of Insolvency of GAAP-Insolvent
Thrifts as of D ecem ber 1988
Number of Institutions
Regulatory A ccounting P ra c tic e s
Number of Institutions
80
G enerally Accepted A ccounting P rin cip les
60
40
20
0
Number of Institutions
Tangible Capital
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
29
som e h a d b e e n i n s o l v e n t m o r e t h a n 10 y e a r s .
" m a r k e t v a l u e " e s t i m a t e s of i n s o l v e n c y ,
measures were
insolvency.
A l t h o u g h no t
these book value
in m o s t c a s e s s t i l l g o o d i n d i c a t o r s of " t r u e "
T h i s p o i n t is r e i n f o r c e d in C h a r t 13, w h i c h s h o w s
the l e n g t h of i n s o l v e n c y for d i f f e r e n t a c c o u n t i n g m e a s u r e s
a ll 205 t h r i f t r e s o l u t i o n s
in 1988.
for
A s u b s t a n t i a l n u m b e r of the
r e s o l v e d t h r i f t s h a d b e e n i n s o l v e n t s i n c e the e a r l y 1 9 80 s.
these institutions been closed much earlier,
Had
o ne c a n o n l y ask
h o w m u c h l e s s c o s t l y t h a n $31 b i l l i o n t h e y w o u l d h a v e b ee n .
I n t e r e s t R a t e s O f f e r e d b y T h r i f t s as S i g n a l s o f T r o u b l e
O n c e in t r o u b l e ,
their deposits
example,
t h r i f t s c an o f f e r
r e l a t i v e l y h i g h r a t e s on
to b o t h r e t a i n a n d a t t r a c t n e w d e p o s i t s
Hirschhorn
(1989)].
C h a r t 14 p r e s e n t s
[see,
for
i n f o r m a t i o n on
d e p o s i t r a t e s o f f e r e d in D e c e m b e r 1 9 8 7 b y the 2 05 t h r i f t s
r e s o l v e d in 19 88 ,
the 50 c o s t l i e s t r e s o l u t i o n s ,
o p e n at y e a r - e n d 1988.
A c r o s s all m a t u r i t i e s ,
thrifts were offering substantially higher
thrifts.
a n d all t h r i f t s
the m o s t t r o u b l e d
r a t e s t h a n all o t h e r
Such hi g h rates can a d v e r s e l y affe c t c o m p e t i n g
i n s t i t u t i o n s as w e l l as e n a b l e a t h r i f t to o b t a i n the f u n d s
n e c e s s a r y to " g a m b l e for r e s u r r e c t i o n . "
Offering higher
rates
to r e t a i n f u n d s a l s o e n a b l e s a t h r i f t to a v o i d s e l l i n g a s s e t s at
prices b e l o w book value,
lower capital
Digitized for FRASER
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Federal Reserve Bank of St. Louis
levels.
t h e r e b y n o t h a v i n g to r e p o r t l o s s e s a n d
30
Chart 13
1988 Thrift Resolutions
Length of Insolvency
Number
of Institutions
Regulatory Accounting Practices
Years Insolvent
Number
of Institutions
Generally Accepted Accounting Principles
<1
1-2
2-3
3-4
4-5
Years Insolvent
60 i-----------------------------------------
Number
of Institutions
Tangible Capital
Digitized for FRASER
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Federal Reserve Bank of St. Louis
Years Insolvent
5-6
6-7
>7
C h a rt 14
D e p o s i t
R a t e s
B a l a n c e s
f o r
F i x e d - T e r m
G r e a t e r
t h a n
A c c o u n t s
$ 1 0 0 , 0 0 0
(D ecem ber 1987)
Average Interest Rate
9
Digitized for FRASER
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Federal Reserve Bank of St. Louis
8.5
All Thrifts Open
at Y ear-en d 1988
All 1988 Resolutions
8
7.5
6.5 ■—1
Costliest 1988
Resolutions
32
S e l e c t e d C h a r a c t e r i s t i c s of 1 9 8 8 T h r i f t R e s o l u t i o n s
C h a r t 15 p r e s e n t s
thrift resolutions
s e l e c t e d c h a r a c t e r i s t i c s of al l 2 05
in 19 8 8 as w e l l as the 50 c o s t l i e s t .
h a l f or m o r e of t h e s e i n s t i t u t i o n s w e r e
net worth basis
Since
i n s o l v e n t on a t a n g i b l e
3 or m o r e y e a r s p r i o r to r e s o l u t i o n ,
o n e h a s to
be c a r e f u l w h e n d e t e r m i n i n g w h e t h e r th e i d e n t i f i e d
c h a r a c t e r i s t i c c o n t r i b u t e d to the f a i l u r e or w h e t h e r
the la c k of
t i m e l y c l o s u r e p e r m i t t e d the i n s t i t u t i o n to c h a n g e its p o r t f o l i o
composition.
If the l a t t e r ,
the t h r i f t h a d t i m e to p u r s u e an
e n d - g a m e s t r a t e g y t h a t m a y h a v e i n c r e a s e d th e f a i l u r e c o s t s .
T he p r e v a l e n c e of the i d e n t i f i e d c h a r a c t e r i s t i c s may,
n o t i n d i c a t e the a c t u a l c a u s e s of f a i l u r e ,
therefore,
b u t r a t h e r the c a u s e s
of h i g h e r f a i l u r e c o s t s .
R e s o l u t i o n C o s t s of State and F e d e r a l l y C h a r t e r e d T h r i f t s
C h a r t 16 p r e s e n t s i n f o r m a t i o n on th e r e s o l u t i o n c o s t s o v e r
the p e r i o d 1 9 8 0 t h r o u g h 19 8 8
for b o t h s t a t e - a n d f e d e r a l l y
c h a r t e r e d t h r i f t i n s t i t u t i o n s at the t i m e of i n s o l v e n c y .
Clearly,
state-chartered institutions have imposed greater costs
u p o n the F S L I C t h a n f e d e r a l l y c h a r t e r e d i n s t i t u t i o n s .
n o t h i n g else,
Board,
t h i s f a c t s u g g e s t s t h a t a ll
the C o n g r e s s ,
r e g u l a t o r s — the B a n k
a n d the s t a t e a u t h o r i t i e s — m u s t a c c e p t some
of t he b l a m e for t he t h r i f t c r i s i s of the 1 9 8 0 s .
Digitized for FRASER
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Federal Reserve Bank of St. Louis
If
C h art 15
Percent of
Resolutions
S e le cte d C h a r a c t e r is t ic s of
1988 Thrift R e so lu tio n s
100
80
60 -
U)
u
40
20
0
Digitized for FRASER
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Federal Reserve Bank of St. Louis
Greater T h u
Twice the
Industry Aver*f«
Proportional
Holdings of
Direct Investment
Greater Than
Twice the
Industry Avenge
Proportional
Holdings of
Brokered Deposits
34
Chart 16
Resolution Costs of State and F e d e ra lly Chartered Thrifts
$ M illions
L
1.900
1.000
1980
1981
1988
1989
1984
1985
1988
1987
N o te: 1 9 0 0 f i g u r e s a r e p r e lim in a r y .
State and Federally Chartered Thrift Resolutions
N um ber o f T h rifts
Digitized for FRASER
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Federal Reserve Bank of St. Louis
49
i
A
1980
1981
24
3
19
L
1988
n
1989
f
e
1984
a
198S
l
23
l
1987
35
C h a n g i n g P o r t f o l i o C o m p o s i t i o n of 1988 R e so l u t i o n s :
1979-1988
Insolvent and m a r g inally solvent thrift institutions
r e m a i n e d o p e n for y e a r s d u r i n g the 1 9 8 0s .
Insufficient monetary
a n d h u m a n r e s o u r c e s are p a r t of the r e a s o n for the f a i l u r e to
resolve
(i.e.,
However,
l i q u i d a t e or m e r g e )
m a n y of t h e s e i n s t i t u t i o n s .
t h e r e a r e u n d o u b t e d l y o t h e r f a c t o r s as w e l l .
T he w a y
in w h i c h f e d e r a l d e p o s i t i n s u r a n c e c a n c r e a t e p r o b l e m s
is b e s t
u n d e r s t o o d b y e x a m i n i n g the r e l a t i o n s h i p b e t w e e n a m a r k e t - b a s e d
m e a s u r e of ri s k a n d the c a p i t a l l e v e l of a t h r i f t .
risk m e a s u r e
is n o t a v a i l a b l e here,
an e x a m i n a t i o n of the
c h a n g i n g p o r t f o l i o c o m p o s i t i o n of t h r i f t s
conducted.
The
Since such a
r e s o l v e d in 19 8 8 is
r e s u l t s a re r e p o r t e d in T a b l e 5 a n d C h a r t 17,
w h e r e the p o r t f o l i o c o m p o s i t i o n is p r o v i d e d for 1 9 7 9 : I V ,
then
w h e n the G A A P c a p i t a l - t o - a s s e t
and
r a t i o e q u a l s 1.5 p e r c e n t ,
f i n a l l y at the t i m e of r e s o l u t i o n .
As capital deteriorates,
i n c e n t i v e to g a m b l e w i t h i n s u r e d d e p o s i t s
incentive
increases.
the
T he
is g r e a t e r w h e n t h e r e is no c a p i t a l a n d y e t the
i n s t i t u t i o n is l e f t o p e n w i t h the s a m e m a n a g e m e n t a n d / o r
ownership.
To our knowledge,
no on e h a s y e t p r o v i d e d e m p i r i c a l
e v i d e n c e t h a t t h i s i n d e e d h a p p e n e d d u r i n g the t h r i f t c r i s i s in
the 1 9 8 0 s .
A c c o r d i n g to T a b l e 5 a n d C h a r t 17,
the t h r i f t s t h a t w e r e
r e s o l v e d in 1 9 8 8 d i d i n d e e d m o v e h e a v i l y i n t o d i r e c t
investment
a n d a c q u i s i t i o n a n d d e v e l o p m e n t l o a n s as t h e i r c a p i t a l d e c l i n e d .
Furthermore,
the c o s t l i e s t r e s o l u t i o n s m o v e d m u c h m o r e h e a v i l y
into these assets.
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Federal Reserve Bank of St. Louis
To the e x t e n t t h a t t h e s e t y p e s of
TABLE 5
CHANGING PORTFOLIO COMPOSITION OF 1988 RESOLUTIONS:
(PERCENT OP ASSETS)
1979-1988
Acquisition &
Development
Loans
Quarter
Reported
Number of
Institutions
Hortgages
Mortgage-Backed
Securities
1979:IV
All-170
Costliest-37
71.9
69.9
2.2
2.7
0.7
0.8
All-205
Costliest-50
48.3
44.2
9.1
8. 2
4.4
9.0
15.6
29.5
23.1
All-205
Costliest-50
43.8
29.4
7.8
7.4
4.3
8.1
5.6
9.0
38.0
46.1
GAAP/TA = 1.5Z
Time of
Resolution
Note:
Digitized for FRASER
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Federal Reserve Bank of St. Louis
Di rect
Investaent
Soae institutions resolved in 1988 were not in existence in 1979.
1.2
1.6
8. 6
Other
Assets
23.9
24.9
C h a r t 17
P o r t f o l i o
C o m p o s i t i o n
1 9 8 8
o f
C o s t l i e s t
R e s o l u t i o n s
Percent of Assets
80%
Mortgages
Mortgage-Backed
Securities
Direct
Investment
Acquisition and
Development Loans
60 -
40 -
20
-
0
1979:IV
GAAP/TA = 1.5%
Quarter Reported
Note:
Some Institutions resolved in 1988 were
not in existence in 1979.
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Federal Reserve Bank of St. Louis
Time of Resolution
38
investments substantially increased overall portfolio
is e v i d e n c e
risk,
this
t h a t m o r a l h a z a r d c o n t r i b u t e d to th e f a i l u r e s a n d
failure costs.
T h i s t y p e of e v i d e n c e is, h o w e v e r ,
certainly
s u b j e c t to d i s p u t e a n d t h u s s h o u l d be v i e w e d as p r e l i m i n a r y at
best.
Nonetheless,
w a y in w h i c h d e p o s i t
alter
it is e m p i r i c a l
information
r e g a r d i n g the
i n s u r a n c e m a y e n a b l e a n i n s t i t u t i o n to
its p o r t f o l i o as its c a p i t a l e r o d e s awa y.
ASSESSING THE SIGNIFICANCE OF RESOLVED THRIFT CHARACTERISTICS
It h a s b e e n s h o w n t h a t t h r i f t i n s t i t u t i o n s do i n d e e d c h a n g e
the c o m p o s i t i o n of t h e i r p o r t f o l i o s as c a p i t a l d e t e r i o r a t e s .
Furthermore,
it h a s b e e n s h o w n t h a t the 2 05 t h r i f t s t h a t w e r e
r e s o l v e d in 1 9 8 8 w e r e g e n e r a l l y i n s o l v e n t y e a r s e a r l i e r .
institutions,
therefore,
These
h a d a m p l e t i m e to t a k e a d v a n t a g e of the
i n s u r e d s t a t u s of t h e i r d e p o s i t s
to " g a m b l e for r e s u r r e c t i o n . "
T h e d e p l e t e d f u n d s of the F S L I C a n d i n a d e q u a t e e x a m i n a t i o n a n d
s u p e r v i s i o n in the e a r l y 1 9 8 0 s ,
moreover,
h e l p e d p r o v i d e the
o p p o r t u n i t y for m a n y t h r i f t s to t ak e the g a m b l e .
e v i d e n c e that,
There
is
b y - a n d - l a r g e , the r e s o l v e d t h r i f t s in 1 9 8 8
e n g a g e d in j u s t t h i s t y p e of b e h a v i o r .
It h a s b e e n f o u n d t h a t
their portfolios changed significantly away from traditional
m o r t g a g e s a nd t o w a r d d i r e c t i n v e s t m e n t a nd a c q u i s i t i o n and
d e v e l o p m e n t loans.
Yet, w h e t h e r t h e s e p a r t i c u l a r a s s e t s w e r e
a s s o c i a t e d w i t h i n c r e a s e d p o r t f o l i o r i s k is s t i l l a d e b a t a b l e
issue.
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Federal Reserve Bank of St. Louis
39
In an a t t e m p t to d e a l m o r e d i r e c t l y w i t h t h i s
individual
thrift
resolution costs
in 19 8 8 w e r e
issue,
r e g r e s s e d on
direct investment and acquisition and d e v e l opment loans
see B a r t h ,
Brumbaugh,
Brumbaugh,
and Sauerhaft
overall
risk,
Sauerhaft,
and Wang
( 1 9 86 )] .
the
(1 985),
[also,
and Barth,
If t h e s e a s s e t s d i d i n c r e a s e
o n e w o u l d e x p e c t t h e m to be s t a t i s t i c a l l y
fx
s i g n i f i c a n t d e t e r m i n a n t s of the c o s t s i m p o s e d u p o n the F S L IC .
j
More generally,
I
I
I
o n e c a n u s e s u c h r e s o l u t i o n c o s t d a t a in an
a t t e m p t to d e t e c t the e f f e c t of m o r a l h a z a r d o n the f e d e r a l
i n s u r e r a n d to a d d r e s s o t h e r
issues
Bernard,
(1 98 9) ].
Pirrong,
and Snyder
[see,
T a b l e 6 p r e s e n t s the e m p i r i c a l
A s m a y be seen,
for e x a m p l e ,
K o rm en d i , |
r e s u l t s of s u c h an exercise.,
both direct investment and a c q u i sition and
'I
I
I
j
development loans have a positive and statistically significant
e f f e c t on r e s o l u t i o n c o s ts .
W h e n the 1 98 8
m ov e d h e a v i l y into these assets,
resolved thrifts
th i s c h a n g e in p o r t f o l i o
c o m p o s i t i o n d i d i n d e e d p r o v e to be q u i t e c o s t l y to the F S L I C
[see,
however,
(1988)].
Benston
Furthermore,
(1 989),
and B e n s t o n and B r u m b a u g h
the e m p i r i c a l
r e s u l t s s h o w t h a t the le ss
t a n g i b l e c a p i t a l a t h r i f t had,
the m o r e c o s t l y w a s the
resolution.
the l o n g e r the p e r i o d of
insolvency,
A t th e s am e time,
t he g r e a t e r the r e s o l u t i o n c o s t s .
not s u r p rising that higher capital
It is,
therefore,
requirements and more timely
c l o s u r e p o l i c i e s a r e m e n t i o n e d as w a y s to p r e v e n t a r e c u r r e n c e
of the t h r i f t c r i s i s of the 1 9 8 0s .
Of c o u r s e ,
appropriate
i n f o r m a t i o n a n d t h e l e g a l a u t h o r i t y ar e n e c e s s a r y to i m p o s e s u c h
requirements and i m p l e m e n t s u c h policies.
Digitized for FRASER
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Federal Reserve Bank of St. Louis
It is a l s o s e e n th at
^
40
TABLE 6
THE EFFECT OF MORAL HAZARD
ON THRIFT RESOLUTION COSTS
Variable to be explained:
Cost of Resolution (millions of dollars)
All Resolutions for vhich Complete
Information Available
Variable
Description
Coefficients
(Standard Errors)
____________ [t-statistics]__________
-24.3
Constant
1.0
-
Tangible Net Worth:
Last Quarter Reported
I
0.4
Months of Tangible
Insolvency
f§:il
Dummy Variable:
If Fraud Present,
DFRAUD = 1
16.3
(8 . 0 )
[2 . 0 ]
1.0
Direct Investment:
Last Quarter Reported
f°:il
0.4
Acquisition & Development
Loans: Last Quarter Reported
m
-0.4
(0 . 1)
1-3.51
Brokered Deposits:
Last Quarter Reported
-
0.1
Average Annual Grovth
Rate: 1983-1985
1- 0 . 6 ]
Dummy Variable:
If in Management Consignment
Program, DMCP = 1
-9.4
(9.3}
[-1.0]
Dummy Variable:
If Closely Held Stock
Institution, DCLOSB = 1
( 12 . 2 )
(0 . 1 )
15.9
[1.3]
0.6
Tax Benefits Granted to
Acquirer
m
o.i
Tax Benefits Rebated to
FSLIC
21.5
Dummy Variable:
If Resolution Came Under
Southvest Plan, SVP = 1
(1:11
5.4
Dummy Variable:
If Resolved in December,
DEC = 1
Digitized for FRASER
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Federal Reserve Bank of St. Louis
ifcli
N
120
R2
.957
F sI a t i s t I r
70S. 6
41
the p r e s e n c e of f r a u d s i g n i f i c a n t l y i n c r e a s e d r e s o l u t i o n co sts.
Beyond these factors,
onl y two other factors are s i g n i f i c a n t
d e t e r m i n a n t s of c o s t s .
average,
Southwest Plan re solutions were,
on
m o r e c o s t l y a n d t h r i f t s w i t h h i g h e r l e v e l s of b r o k e r e d
deposits were,
on average,
le s s c o s t l y .
A l t h o u g h still preliminary,
these results are c o n s i s t e n t
w i t h the v i e w t h a t f e d e r a l d e p o s i t i n s u r a n c e c r e a t e d a m o r a l
h a z a r d p r o b l e m t h a t w a s i n s u f f i c i e n t l y c o n t a i n e d in the 1 980s.
As a result,
o n e s h o u l d h a v e e x p e c t e d m o r e f a i l u r e s and,
more importantly,
far g r e a t e r
o t h e r w i s e b e e n the case.
failure costs than would have
A s E d w a r d K a n e h a s b e e n a r g u i n g for
y e a r s — q u o t i n g f r o m o n e of h i s m o r e
economic environment
perhap
r e c e n t a r t i c l e s — "In an
in w h i c h d e p o s i t i n s t i t u t i o n s ar e h i g h l y
l e v e r e d a n d e n t e r i n g n e w b u s i n e s s e s e v e r y d a y a n d in w h i c h
interest rates are h i g h l y volatile,
systematically mispricing
deposit-insurance guarantees encourages deposit-institution
m a n a g e r s to p o s i t i o n t h e i r f i r m s on the e d g e of f i n a n c i a l
disaster"
[K a n e
( 1 9 8 6 ) , p. 100].
Much work
r e m a i n s to be d o n e
to c o n f i r m or d i s c o n f i r m t h e s e f i n d i n g s .
B a s e d u p o n t he t h e o r e t i c a l a n d e m p i r i c a l w o r k to d a t e ,
it
a p p e a r s t h a t i n s u f f i c i e n t c a p i t a l a n d the l a c k of a t i m e l y
closure
rul e w e r e m a j o r c a u s e s of the t h r i f t c r i s i s .
T he B a n k
B o a r d r e s p o n d e d to t h i s s i t u a t i o n in l a t e 19 8 8 b y p u t t i n g o u t
for c o m m e n t a p r o p o s a l
for a n e w a n d h i g h e r c a p i t a l
t h a t is r i s k - a d j u s t e d as w e l l as a p r o p o s a l
intervention.
for e a r l y
Fo r w i t h o u t c a p i t a l a n d y e t l e f t o p e n to o p e r a t e
with insured deposits,
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
requirement
t h r i f t s h a d s t r o n g i n c e n t i v e s to m o v e
42
into riskier activities.
A t the t i m e of r e s o l u t i o n ,
of c o u r s e ,
o n e w o u l d f i n d the r i s k i e r a s s e t s on the b o o k s of t h r i f t s a n d be
s t r o n g l y t e m p t e d to b l a m e t h o s e a s s e t s — or d e r e g u l a t i o n — for the
problem.
However,
the o b v i o u s c o n c l u s i o n is n o t a l w a y s the
c o r r e c t one.
SUMMARY AND CONCLUSIONS
T h r i f t s d e v e l o p e d in the U n i t e d S t a t e s m o r e t h a n 150 y e a r s
ago.
They grew and prospered by offering financial
generally available elsewhere.
services not
It is u s u a l l y o v e r l o o k e d t h a t
t h i s w a s d o n e in a n e s s e n t i a l l y u n r e g u l a t e d e n v i r o n m e n t
Barth and Regalia
(1988)].
[see
Thrifts structured their balance
s h e e t s a n d e s t a b l i s h e d a t y p e of o w n e r s h i p t h a t w a s d e s i g n e d to
produce minimum disruption.
disruptions:
in the 1890 s,
D e s p i t e this,
the 1 9 30 s,
there were
a n d a g a i n in the 19 8 0 s .
A l t h o u g h there were only three wid e s p r e a d disruptions,
their
s e v e r i t y w a s e n o u g h to b r i n g a b o u t m a j o r l e g i s l a t i v e a n d
a s s ociated regulatory action.
This action un d o u b t e d l y corrected
s o m e of th e p r o b l e m s a n d p r e v e n t e d s t i l l m o r e p r o b l e m s
developing.
T h e i ss u e ,
of c o u r s e ,
from
is w h e t h e r th e g o v e r n m e n t
a c t i o n a l s o s e t th e s t a g e for s t i l l f u r t h e r p r o b l e m s
in the
future.
T h i s p a p e r h a s a t t e m p t e d to a d d r e s s t h i s i s s u e b y f o c u s i n g
on th e m o r a l h a z a r d p r o b l e m c r e a t e d b y f e d e r a l d e p o s i t
insurance.
1980s.
M a n y f a c t o r s c o n t r i b u t e d to the t h r i f t c r i s i s of the
T h i s f a c t is w e l l k n o w n .
But empirical evidence
p e r t a i n i n g to t he w a y in w h i c h the e x i s t e n c e of d e p o s i t
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
43
insurance itself exacerbated,
if n o t a c t u a l l y c a u s e d ,
is to o u r k n o w l e d g e n o n e x i s t e n t .
v oi d,
In a n a t t e m p t to fi l l t hi s
e v i d e n c e has been p r e s e n t e d that shows that cap i t a l -
d e f i c i e n t t h r i f t s n o t o n l y h a v e a n i n c e n t i v e to e n g a g e
r i s k i e r a c t i v i t i e s w i t h i n s u r e d funds,
so.
the c r i s i s
in
b u t a p p e a r to h a v e d o n e
It h a s a l s o b e e n f o u n d t h a t the a s s e t s t h a t t r o u b l e d
t h r i f t s m o v e d m o r e h e a v i l y i n t o i m p o s e d h i g h e r c o s t s u p o n the
insurer once they were resolved.
Certainly much more empirical
w o r k n e e d s to be p e r f o r m e d in th i s a re a ,
b u t for n o w it a p p e a r s
t h a t f e d e r a l d e p o s i t i n s u r a n c e i t s e l f is a m a j o r c u l p r i t in the
1980s thrift crisis.
E v e n so, a g a i n s t t h i s c o s t m u s t be w e i g h e d
the b e n e f i t of h a v i n g i n s u r a n c e in p l a c e to p r e v e n t a c o m p l e t e
l o s s of c o n f i d e n c e
in ou r n a t i o n ' s d e p o s i t o r y i n s t i t u t i o n s a n d
thus w i d e s p r e a d dep os it or
economy.
And,
ru n s t h a t c a n s e v e r e l y d i s r u p t an
a c c o r d i n g to G e o r g e K a u f m a n
(1987,
p . 24),
" A l t h o u g h t he i n c e n t i v e - f o r - r i s k - t a k i n g p r o b l e m a r i s e s f r o m
federal deposit insurance,
t he s o l u t i o n . "
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
a b o l i t i o n of f e d e r a l i n s u r a n c e is n o t
44
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http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis