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

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

Posted: 4 Jun 1996

See all articles by Randall Kroszner

Randall Kroszner

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

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 Classification: G28

Suggested Citation

Kroszner, Randall and Strahan, Philip E., Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress. J. OF FINANCE, Vol. 51 No. 4, September 1996, Available at SSRN: https://ssrn.com/abstract=7497

Randall Kroszner

University of Chicago - Booth School of Business ( email )

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Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
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United States
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HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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