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Thrifty Viability and Traditional Mortgage Lending: A Simultaneous Equations Analysis of the Risk-Return Trade-Off



A number of studies have argued that the thrift industry is not viable as it is presently structured and regulated because mortgage yields are inadequate to cover interest and operating costs. This hypothesis suggests that observed profitability is primarily the result of the tendency of the industry to "ride" the yield curve by borrowing short and lending long. To evaluate this argument, we construct a simultaneous-equations model of thrift risk (maturity gap positions) and return (net interest margin). We find support for the notion that the industry could not be reasonably profitable if it did not take on significant interest-rate risk. For instance, a zero gap position produces a return on assets of only 19 basis points and a return on equity of only 4%. We also estimate the amount of interest-rate risk the industry can employ to increase returns on equity and assets. Our estimates show that over 50% of thrift profits earned during this period are the result of negative gap positions and interest-rate speculation. As earlier research shows, changes in regulations affecting thrift asset and liability choices can be counterproductive.

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  • M. Cary Collins & Van Son Lai & James E. McNulty, 1997. "Thrifty Viability and Traditional Mortgage Lending: A Simultaneous Equations Analysis of the Risk-Return Trade-Off," Journal of Real Estate Research, American Real Estate Society, vol. 13(2), pages 155-176.
  • Handle: RePEc:jre:issued:v:13:n:2:1997:p:155-176

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    References listed on IDEAS

    1. Robert A. Eisenbeis & Myron L. Kwast, 1989. "Are real estate specializing depositories viable? The evidence from commercial banks," Finance and Economics Discussion Series 88, Board of Governors of the Federal Reserve System (U.S.).
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    6. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 581-600, November.
    7. Morgan, George Emir & Smith, Stephen D, 1987. " Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries," Journal of Finance, American Finance Association, vol. 42(4), pages 1023-1034, September.
    8. Flannery, Mark J, 1981. "Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(5), pages 1085-1101, December.
    9. R. Dan Brumbaugh, Jr. & Andrew S. Carron, 1987. "Thrift Industry Crisis: Causes and Solutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 349-388.
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    12. O'Hara, Maureen, 1983. " A Dynamic Theory of the Banking Firm," Journal of Finance, American Finance Association, vol. 38(1), pages 127-140, March.
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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services


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