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The Continued Interest-Rate Vulnerability of Thrifts

In: Financial Markets and Financial Crises

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  • Patric H. Hendershott
  • James D. Shilling

Abstract

The 1980s S&L debacle is generally viewed as the result of: (1) sharply rising interest rates eliminating the net worth of thrifts funding fixed-rate loans with short-term deposits and (2) thrifts responding by taking even greater interest-rate and credit risks. The question investigated in this paper is how vulnerable do thrifts remain to an interest rate experience like that which triggered the 1980s S&L debacle? The short answer is that thrifts are even more vulnerable in 1989 than they were in 1977. The dollar volume of fixed-rate mortgages funded by short-term deposits in 1989, $400 billion, is slightly greater now than it was in 1977, and thrifts have also put over $325 billion of adjustable-rate loans with rate caps on their balance sheets. A sharp rise in interest rates (the one-year Treasury rate rose by 9 percentage points between 1977 and 1981) would cause significant losses on these capped loans, as well as on the fixed-rate loans.
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Suggested Citation

  • Patric H. Hendershott & James D. Shilling, 1991. "The Continued Interest-Rate Vulnerability of Thrifts," NBER Chapters, in: Financial Markets and Financial Crises, pages 259-282, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:11488
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    References listed on IDEAS

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    1. Patric H. Hendershott, 1985. "Pricing Adjustable Rate Mortgages," NBER Working Papers 1548, National Bureau of Economic Research, Inc.
    2. Stephen A. Buser & Patric H. Hendershott & Anthony B. Sanders, 1985. "Pricing Life‐of‐Loan Rate Caps on Default‐Free Adjustable‐Rate Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 248-260, September.
    3. George G. Kaufman, 1984. "Measuring and managing interest rate risk: A primer," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 8(Jan), pages 16-29.
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    Cited by:

    1. Patric H. Hendershott & Herbert M. Kaufman (ary), 1992. "The market for home mortgage credit: recent changes and future prospects," Proceedings, Federal Reserve Bank of St. Louis, pages 99-127.
    2. Martin Hellwig, 2009. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," De Economist, Springer, vol. 157(2), pages 129-207, June.

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