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

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  • Kroszner, Randall S
  • Strahan, Philip E

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. The authors test a theory of how regulators encouraged capital-impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. They 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 nonfinancial firms experiencing distress. Copyright 1996 by American Finance Association.

Suggested Citation

  • Kroszner, Randall S & Strahan, Philip E, 1996. " Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress," Journal of Finance, American Finance Association, vol. 51(4), pages 1285-1319, September.
  • Handle: RePEc:bla:jfinan:v:51:y:1996:i:4:p:1285-1319
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    Cited by:

    1. Carletti, Elena & Hartmann, Philipp & Ongena, Steven, 2015. "The economic impact of merger control legislation," International Review of Law and Economics, Elsevier, vol. 42(C), pages 88-104.
    2. Randall S. Kroszner & Philip E. Strahan, 1998. "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," NBER Working Papers 6637, National Bureau of Economic Research, Inc.
    3. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series,in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
    4. Philip E. Strahan, 2004. "Commentary on "Risk and return of publicly held versus privately owned banks"," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 109-113.
    5. João Granja & Christian Leuz, 2017. "The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity," NBER Working Papers 24168, National Bureau of Economic Research, Inc.
    6. Randall S. Kroszner, "undated". "Testimony of Randall S. Kroszner Before the Committee on Banking and Financial Services, U.S. House of Representatives, April 29, 1998," CRSP working papers 473, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. Huizinga, Harry & Laeven, Luc, 2012. "Bank valuation and accounting discretion during a financial crisis," Journal of Financial Economics, Elsevier, vol. 106(3), pages 614-634.
    8. M. Girotti & R. Meade, 2017. "U.S. Savings Banks' Demutualization and Depositor Welfare," Working papers 639, Banque de France.
    9. Floyd, Eric & Li, Nan & Skinner, Douglas J., 2015. "Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends," Journal of Financial Economics, Elsevier, vol. 118(2), pages 299-316.
    10. Calomiris, Charles W. & Nissim, Doron, 2014. "Crisis-related shifts in the market valuation of banking activities," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 400-435.
    11. Randall S. Kroszner & Philip E. Strahan, 1999. "Bankers on Boards: Monitoring, Conflicts of Interest, and Lender Liability," NBER Working Papers 7319, National Bureau of Economic Research, Inc.
    12. Lambert, Thomas, 2015. "Lobbying on Regulatory Enforcement Actions: Evidence from Banking," HIT-REFINED Working Paper Series 28, Institute of Economic Research, Hitotsubashi University.
    13. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
    14. John Kandrac & Bernd Schlusche, 2017. "The Effect of Bank Supervision on Risk Taking : Evidence from a Natural Experiment," Finance and Economics Discussion Series 2017-079, Board of Governors of the Federal Reserve System (U.S.).
    15. repec:eee:jbfina:v:91:y:2018:i:c:p:146-159 is not listed on IDEAS
    16. Armen Hovakimian & Edward J. Kane & Luc Laeven, 2012. "Tracking Variation in Systemic Risk at US Banks During 1974-2013," NBER Working Papers 18043, National Bureau of Economic Research, Inc.
    17. repec:eee:jfinec:v:112:y:2014:i:2:p:251-268 is not listed on IDEAS
    18. Keefer, Philip, 2004. "Elections, special interests, and the fiscal costs of financial crisis," Policy Research Working Paper Series 3439, The World Bank.
    19. Liu, Wai-Man & Ngo, Phong, 2012. "Elections, Political Competition and Bank Failure," MPRA Paper 43603, University Library of Munich, Germany.
    20. Sandra E. Black & Philip E. Strahan, 2001. "The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry," American Economic Review, American Economic Association, vol. 91(4), pages 814-831, September.
    21. Keefer, Philip, 2007. "Beyond legal origin and checks and balances : political credibility, citizen information, and financial sector development," Policy Research Working Paper Series 4154, The World Bank.
    22. Matej Marinc & Razvan Vlahu, 2011. "The Economic Perspective of Bank Bankruptcy Law," DNB Working Papers 310, Netherlands Central Bank, Research Department.
    23. Duran, Miguel A. & Lozano-Vivas, Ana, 2014. "Risk shifting in the US banking system: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 64-74.

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