Academic journal article Journal of Money, Credit & Banking

Regulatory Changes and Federal Mutual Thrift Behavior: Evidence from the 1980s

Academic journal article Journal of Money, Credit & Banking

Regulatory Changes and Federal Mutual Thrift Behavior: Evidence from the 1980s

Article excerpt

The devastation of thrift profits and the devaluation of their asset portfolios during the late seventies and early eighties suggest to many that traditional thrift institutions cannot survive extreme upward movements or severe twists in the term structure of interest rates. The Depository Institutions Deregulation and Monetary Control Act (1980) and the Garn-St Germain Depository Institutions Act (1982) expanded federal thrifts' powers promoting diversification into shorter duration assets, hence reducing the duration mismatch carried by traditional thrifts and allowing federal thrifts (mostly savings and loans with some newly chartered savings banks) to offer more of the products and services traditionally offered by banks.(1) A conclusion (Business Week 1988) popular even with the U.S. League of Savings Institutions is that thrifts, as an industry, took advantage of their new powers producing industry-wide problems necessitating re-regulation. Such a reversal of regulatory trends is evident in die Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) passed in 1989.(2) On the other hand, some recent analyses proffer that deregulation was not the root cause of the current financial problems with thrifts and banks (Botsey and Kuprianov 1990).

This research examines the changes in asset composition of federal savings and loans and federal savings banks, federal mutual thrifts (FMTs),(3) in the 1980s and distinguishes the roles played by factors associated with dedication to housing finance versus factors associated with diversification. The new powers allow greater diversification through increased acquisition of non-housing related assets relative to traditional housing and mortgage related assets. This study compares the behavior of FMTs over a five-year period surrounding the deregulation from 1979 through 1983 to FMT behavior during the subsequent five-year period from 1984 through 1988 when no major federal regulatory changes took place. Of the 1,997 federal thrifts in operation in June 1979, 1,979 were FMTs and only 18 were federal stock thrifts (FSTs). In December 1983, 1,435 of the 1,997 institutions were still in operation consisting of 1,367 FMTs and 68 FSTs. Five years later in December 1988, 1,203 of the 1,997 institutions continued to operate, then consisting of 858 FMTs and 345 FSTs. Because there were so few FSTs in the period surrounding the deregulation, a comparison of FST behavior across the two time periods is not reliable. Furthermore, potentially confounding conversion effects may distort the findings of an analysis including FMTs that converted to FSTs. [See Carter and Stover (1990), Barth, Bartholomew, and Bradley (1990), and Masulis (1987) for recently published evidence on the effects of conversion on riskiness, expense preference, cost of failure resolution, and returns to owners.] FMTs, rather than state-chartered mutual thrifts (SMTs), are the focus of this study because FMTs have consistent regulations across states (and between savings and loan associations and savings banks) and are directly affected by the legislation, whereas SMTs' regulations differ from state to state (and between savings and loan associations and savings banks). [See Baker (1982), Crockett and King (1982), Eisenbeis (1983), Eisenbeis and Kwast (1986), and Walker (1983) for studies anticipating and forecasting the effects of deregulation.]

Section 1 of this paper describes a microeconomic model of thrift behavior in the presence of various regulatory constraints that may be relaxed. The data and development of the empirical model are discussed in section 2 and the implications of specialization, acquired experience, and moral hazard (alternative hypotheses) are described. Section 3 contains the empirical analysis of changes in thrift portfolio structure. The strongest support is given to the alternative interpretation that the need for experience in new lending areas played a substantial role in determining the extent to which the expanded powers were employed in the early 1980s. …

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