When are Thrifts Closed? An Agency-Theoretic Model

38 Pages Posted: 18 Nov 2008

Date Written: November, 16 2008

Abstract

This article examines the determinants of both book-value insolvency and regulatory closure in the thrift industry. Agency theory suggests that the determinants of insolvency and closure are a function of conflicts between shareholders and creditors, shareholders and managers, and regulators and taxpayers. Certain thrift attributes may have differing effects upon insolvency and closure because regulators' best interests may not be served by promptly closing insolvent institutions. In this study, both thrift insolvency and thrift closure are modeled as functions of two broad risk factors: operating risk and agency risk. Using a bivariate probit model to jointly examine determinants of insolvency and closure, the analysis reveals that measures of both operating risk and agency risk generally are statistically significant with the expected signs, providing evidence consistent with the existence both of moral hazard by thrift oweners and of expense-preferent behavior by thrift managers. The results also show that agency conflicts between regulators and taxpayers are important in explaining why some thrifts were closed while others were not.

Keywords: closure, deposit insurance, FHLBB, FSLIC, insolvency, OTS, principal-agent, savings & loan, S&L, thrift

JEL Classification: C25, G18, G21, G33, G38, E53

Suggested Citation

Cole, Rebel A., When are Thrifts Closed? An Agency-Theoretic Model (November, 16 2008). Journal of Financial Services Research, Vol. 7, No. 4, 1993. Available at SSRN: https://ssrn.com/abstract=1302409

Rebel A. Cole (Contact Author)

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

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