The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation

By Lawrence J. White | Go to book overview

penalties for violations. The threat or actuality of these suits reduces the expected gain from risk taking and adds to the expected losses.

Further, in a number of the FSLIC's 1988 placements of insolvent thrifts with acquirers the FSLIC retained warrants equal (usually) to a 20 percent ownership position in the transferred thrift. Like a deductible clause or co-insurance, these warrants have both direct and indirect benefits for the insurer: The warrants will directly give the insurance fund a 20 percent share of any gains by these thrifts; and this 20 percent share for the insurance fund will reduce the thrift's expected gains from any risk-taking and thereby reduce somewhat the thrift's incentives to take risks. 29


Notes
1.
Most of the discussion in this chapter will focus on banks and thrifts, but the lessons apply to credit unions as well.
2.
Both Chapters 10 and 11 draw heavily on White ( 1989a).
3.
Safety-and-soundness regulation should be distinguished from consumer information and protection regulation (such as truth-in-lending information requirements) and economic regulation (such as limits on interstate branching); see Chapter 3.
4.
Depositories, by providing checking accounts, also provide a payments mechanism. The trustworthiness of the payments mechanism, though, ultimately relies on the trustworthiness of the deposits.
5.
The Securities and Exchange Commission's regulation of the financial markets consists primarily of information disclosure regulation, not safety-and-soundness regulation. Where other financial sector companies (e.g., insurance companies and pension funds) are subject to "prudential" regulation (the equivalent of safety-and-soundness regulation), the justification is the regulators' concerns about the liability holders of these companies: insurance claimants and pension beneficiaries. Thus, the justification for this regulation is similar to the rationale for safety-and- soundness regulation of depositories.
8.
If banks could simply suspend their promise of payment until they could convert their assets into cash at a reasonable pace, this suspension would ease the bank's problems; however, it would mean an unilateral abrogation of the bank's "contract" with its depositors and would deprive them of the promised liquidity of their assets.

-219-

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