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The Determinants of Efficiency and Solvency in Savings and Loans

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  • Benjamin E. Hermalin
  • Nancy E. Wallace

Abstract

We study the efficiency and solvency of savings and loans institutions (thrifts). Thrifts that were inefficient (according to a nonparametric measure) were 4 1/2 times more likely than efficient thrifts to fail in the future. We also find that absent controls for lines of business pursued, stock institutions were both less efficient and more likely to fail than mutuals. With controls, these results are reversed. A consistent explanation is that stock institutions are better at resolving the standard agency conflict between owners and managers, but worse at resolving the "asset-substitution" conflict between shareholders and debtholders (depositors). Last, we find that some lines of business deregulated by the Garn-St. Germain Act adversely affected efficiency and solvency.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 25 (1994)
Issue (Month): 3 (Autumn)
Pages: 361-381

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Handle: RePEc:rje:randje:v:25:y:1994:i:autumn:p:361-381

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Cited by:
  1. Mohamed Ariff & Luc Can, 2009. "IMF Bank-Restructuring Efficiency Outcomes: Evidence from East Asia," Journal of Financial Services Research, Springer, vol. 35(2), pages 167-187, April.
  2. Zuzana Iršová & Tomáš Havránek, 2010. "Measuring Bank Efficiency: A Meta-Regression Analysis," Prague Economic Papers, University of Economics, Prague, vol. 2010(4), pages 307-328.
  3. A. Cole, Rebel & Mehran, Hamid, 1998. "The effect of changes in ownership structure on performance: Evidence from the thrift industry," Journal of Financial Economics, Elsevier, vol. 50(3), pages 291-317, December.
  4. Benjamin E. Hermalin & Andrew K. Rose, 1999. "Risks to Lenders and Borrowers in International Capital Markets," NBER Working Papers 6886, National Bureau of Economic Research, Inc.
  5. Patricia Born & William M. Gentry & W. Kip Viscusi & Richard J. Zeckhauser, 1998. "Organizational Form and Insurance Company Performance: Stocks versus Mutuals," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 167-192 National Bureau of Economic Research, Inc.
  6. Paula A. Tkac, 2004. "Mutual funds: temporary problem or permanent morass?," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 1-21.
  7. J. David Cummins & Mary A. Weiss, 1998. "Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency Methods," Center for Financial Institutions Working Papers 98-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Goodhue, Rachael E. & Rausser, Gordon C. & Simon, Leo K., 1998. "Understanding Production Contracts: Testing An Agency Theory Model," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20946, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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