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Deregulation Gone Awry: Moral Hazard in the Savings and Loan Industry

51 Pages Posted: 3 Nov 2008  

Rebel A. Cole

College of Business--Florida Atlantic University

Joseph McKenzie

Government of the United States of America - Federal Housing Finance Board (FHFB)

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

Abstract

This article tests several hypotheses concerning the failure of thrift institutions and the costs these failures imposed upon the thrift deposit insurance fund. The central hypothesis posits that thrift failures during the 1986-1989 period were largely a function of portfolio decisions made by thrift managers during the mid-1980s, which, in turn, were strongly influenced by the structural characteristics of these thrifts in the early 1980s. A sample of 1,654 healthy thrifts and 621 failed or soon-to-fail thrifts for which consistent official estimates of the cost of liquidation were available from the FSLIC is analyzed using a variation of the technique suggested by Heckman (1979) to correct for sample-selectivity bias. The results provide strong support for the central hypothesis, demonstrating that these portfolio choices and structural characteristics are strong determinants of the likelihood and cost of failure, and that the structural characteristics strongly influence the subsequent portfolio choices.

Keywords: deregulation, failure, moral hazard, S&L, thrift

JEL Classification: G21, G28

Suggested Citation

Cole, Rebel A. and McKenzie, Joseph and White, Lawrence J., Deregulation Gone Awry: Moral Hazard in the Savings and Loan Industry. Available at SSRN: https://ssrn.com/abstract=1293468 or http://dx.doi.org/10.2139/ssrn.1293468

Rebel Cole (Contact Author)

College of Business--Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Joseph McKenzie

Government of the United States of America - Federal Housing Finance Board (FHFB) ( email )

1700 G St., NW
Washington, DC 20006
United States

Lawrence White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
New York, NY NY 10012
United States

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