SSRN-Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress by Randall Kroszner, Philip Strahan

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Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress

RANDALL S. KROSZNER
U.S. Council of Economic Advisors; University of Chicago; National Bureau of Economic Research (NBER)
PHILIP E. STRAHAN
Boston College - Department of Finance; National Bureau of Economic Research (NBER)

J. OF FINANCE, Vol. 51 No. 4, September 1996

Abstract:
During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual-to-stock conversions. We test a theory of how regulators encouraged capital-impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by non- financial firms experiencing distress.

JEL Classifications: G28

Accepted Paper Series

Contact Information for PHILIP E. STRAHAN (Contact Author) Email address for PHILIP E. STRAHAN Boston College - Department of Finance Carroll School of Management 140 Commonwealth Avenue Chestnut Hill , MA 02467-3808 United States 617-552-6430 (Phone) 617-552-0431 (Fax)
(No e-mail address available for PHILIP E. STRAHAN National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge , MA 02138 United States
Contact Information for RANDALL S. KROSZNER Email address for RANDALL S. KROSZNER U.S. Council of Economic Advisors Eisenhower Executive Office Building 17th and Pennsylvania Avenue, NW Washington , DC 20502 United States
Email address for RANDALL S. KROSZNER University of Chicago 1101 East 58th Street Graduate School of Business Chicago , IL 60637 United States 773-702-8779 (Phone) 773-702-0458 (Fax)
(No e-mail address available for RANDALL S. KROSZNER National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge , MA 02138 United States

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