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Troubled savings and loan institutions: voluntary restructuring under insolvency

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Author Info

  • Ramon P. DeGennaro
  • Larry H. Lang
  • James B. Thomson

Abstract

Regulatory agencies are unwilling or unable to close thrift institutions immediately upon insolvency. Instead, they have progressively reduced the thrift capital requirement, refrained from enforcing that requirement, and allowed thrifts to hold more nonmortgage loans in the hope that the industry would recover. According to this study, only 13 percent of the largest 300 firms eventually recovered between the end of 1979 and the end of 1989. When the thrift crisis surfaced in the early 1980s, the firms that ultimately recovered operated in a fashion similar to those that eventually failed. But in the mid-1980s, recovered thrifts pursued a risk-minimizing strategy, while nonrecovered thrifts pursued a risky, high-growth strategy. We find no evidence that managers of unsuccessful firms consumed more perquisites than their successful counterparts.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9112.

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Date of creation: 1991
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Handle: RePEc:fip:fedcwp:9112

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Keywords: Savings and loan associations;

References

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  1. Ramon P. DeGennaro & James B. Thomson, 1992. "Capital forbearance and thrifts: an ex post examination of regulatory gambling," Working Paper 9209, Federal Reserve Bank of Cleveland.
  2. Ritchken, Peter & Thomson, James B. & DeGennaro, Ramon P. & Li, Anlong, 1993. "On flexibility, capital structure and investment decisions for the insured bank," Journal of Banking & Finance, Elsevier, vol. 17(6), pages 1133-1146, December.
  3. Ronn, Ehud I & Verma, Avinash K, 1986. " Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-95, September.
  4. John, Kose & John, Teresa A. & Senbet, Lemma W., 1991. "Risk-shifting incentives of depository institutions: A new perspective on federal deposit insurance reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 895-915, September.
  5. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  6. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, December.
  7. Barth, James R & Bartholomew, Philip F & Bradley, Michael, 1990. " Determinants of Thrift Institution Resolution Costs," Journal of Finance, American Finance Association, vol. 45(3), pages 731-54, July.
  8. Flannery, Mark J., 1991. "Pricing deposit insurance when the insurer measures bank risk with error," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 975-998, September.
  9. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
  10. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
  11. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
  12. James B. Thomson, 1987. "FSLIC forbearances to stockholders and the value of savings and loan shares," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 26-35.
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Cited by:
  1. Ramon P. DeGennaro & James B. Thomson & Robert A. Eisenbeis & ary, 1993. "Capital forbearance and thrifts: an ex post examination of regulatory gambling," Proceedings 421, Federal Reserve Bank of Chicago.

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