The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

Smith note that with the MMC's introduction "the dilemma of funding long- term assets with short-term deposits was exacerbated.'' 48 However, such a description misses part of the point of these certificates. Money that is placed in an MMC at an SLA is much more likely to remain on deposit at the association and to be cheaper over time than deposits subject to ceilings. A certificate with a longer maturity than the six-month MMC, but which is also at a below- market rate due to ceilings, is much more likely to be withdrawn at maturity. This means that any assets financed with this longer-term certificate will likely have to be refinanced with borrowed money. It is still valid to assume that borrowed money is more expensive than deposit money, if for no other reason than that the former is not insured by the FSLIC and the latter is. 49 In fact, simulations reported by Jaffee and Rosen indicate that were it not for the MMCs in 1979, the SLAs would have had a disintermediation of roughly $24 billion rather than the net inflow of $38 billion they actually received. 50


CONCLUSIONS

As pointed out earlier, the debate about the removal of ceilings is not as significant today as it would have been ten years ago. The reason is the much smaller percentages of deposits that are actually subject to the ceilings. The imposition of ceilings may have been one of the more politically feasible policy choices available back in 1966. Unfortunately, they have had consequences which, while rational from an economic perspective, have been economically inefficient. That is, the SLAs have competed for deposits on a nonprice basis. There is also some evidence they may have engaged in expense-preference behavior in the form of larger salaries and more branches. The probable consequences of these actions is that many SLAs are not going to be in a competitive position when ceilings are lifted. Indeed, some SLAs may well become bankruptcies or supervisory merger candidates. There is evidence, however, that the industry as a whole should be able to eliminate or phase out the implicit interest expenses within the relatively short time of a few years. They may also be forced to eliminate their expense-preference behavior as they are forced to compete with market rates for all of their deposits.

The elimination of the ceilings should then mean that SLAs will be less subject to the disintermediation crises they have repeatedly suffered over the last 15 years. Although the elimination will mean the loss of some economic profit, it should lead to fewer problems because of interest rate risk exposure and a more profitable, healthier industry.


NOTES
1.
George Kaufman, Larry Mote, and Harvey Rosenblum, "Implications of Deregulation for Product Lines and Geographical Markets of Financial Institutions," a paper

-148-

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The Savings and Loan Industry: Current Problems and Possible Solutions
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables ix
  • Acknowledgments xi
  • Introduction xiii
  • Note xv
  • Abbreviations xvii
  • 1 - History of the Federal Home Loan Bank System 3
  • Notes 23
  • 2 - The Determinants of Profitability for Savings and Loans 28
  • 3 - Measuring the Interest Rate Risk Exposure of Savings and Loans 49
  • Notes 67
  • 4 - Alternative Mortgage Instruments 70
  • Notes 97
  • 5 - Financial Futures and Forward Commitments 104
  • Notes 121
  • 6 - Consumer Lending 124
  • Notes 135
  • 7 - The Elimination of Interest Rate Ceilings 138
  • Notes 148
  • 8 - The Introduction of Now Accounts 152
  • Notes 160
  • 9 - Mergers and Conversions 163
  • SUMMARY AND CONCLUSIONS 184
  • 10 - The Future 189
  • Notes 195
  • Bibliography 197
  • Index 211
  • About the Author 217
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