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Mutual-to-stock-conversions by New England savings banks: where has all the money gone?

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  • Katerina Simons

Abstract

In the aftermath of the real estate slump and the attendant financial troubles of the New England banks, it is natural to look for causes and contributing factors. One phenomenon that has received its share of the blame is the rush of conversions by thrifts in the mid 1980s from mutual to stock form of ownership. Conversions were hailed initially as a way to fortify the eroded capital of thrifts and increase their safety and soundness. ; This article compares the behavior of converted thrifts with that of the mutuals. It finds that converted institutions took greater risks, suffered bigger losses, and failed at a higher rate than the mutuals despite being very highly capitalized after conversion. Three conclusions are reached. First, converted thrifts accounted for a substantial share of the increase in real estate financing during the boom of the mid 1980s. Second, ability to take greater risk, rather than efficiency, appears to have been a dominant motive for thrift conversions in New England. And third, even very high capital ratios may not prove sufficient if an institution takes big risks in its loan portfolio.

Suggested Citation

  • Katerina Simons, 1992. "Mutual-to-stock-conversions by New England savings banks: where has all the money gone?," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 45-53.
    • Handle: RePEc:fip:fedbne:y:1992:i:mar:p:45-53
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    File URL: http://www.bostonfed.org/economic/neer/neer1992/neer292d.pdf
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    References listed on IDEAS

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    1. Mester, Loretta J., 1991. "Agency costs among savings and loans," Journal of Financial Intermediation, Elsevier, vol. 1(3), pages 257-278, June.
    2. J. Amanda Adkisson & Donald R. Fraser, 1991. "The link between merger premiums and subsequent target bank risk," Proceedings 339, Federal Reserve Bank of Chicago.
    3. Loderer, Claudio F. & Sheehan, Dennis P. & Kadlec, Gregory B., 1991. "The pricing of equity offerings," Journal of Financial Economics, Elsevier, vol. 29(1), pages 35-57, March.
    4. Masulis, Ronald W., 1987. "Changes in ownership structure : Conversions of mutual savings and loans to stock charter," Journal of Financial Economics, Elsevier, vol. 18(1), pages 29-59, March.
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    1. Cagle, Julie A. B. & Porter, Gary E., 1997. "Conversions of mutual savings institutions: Do initial returns from these IPOS provide investors with windfall profits?," Financial Services Review, Elsevier, vol. 6(2), pages 141-150.
    2. Neil Murphy & Dan Salandro, 1997. "Form of ownership and risk taking in banking: Some evidence from Massachusetts savings banks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 21(3), pages 19-28, September.
    3. Paul Leonard & Rita Biswas, 1998. "The Impact of Regulatory Changes on the Risk-Taking Behavior of State Chartered Savings Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(1), pages 37-69, February.
    4. Steven Cox & Dianne Roden, 1999. "Initial public offerings by mutual thrifts: The regulatory impact," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 23(2), pages 113-122, June.
    5. Catherine M. Schrand & Haluk Unal, 1995. "Hedging and Coordinated Risk Management: Evidence from Thrift Conversions," Center for Financial Institutions Working Papers 96-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Peristiani, Stavros & Wizman, Thierry A., 1997. "Mutual-to-stock conversions in the thrift industry in the 1990s," Journal of Economics and Business, Elsevier, vol. 49(2), pages 95-116.

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