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Capital forbearance and thrifts: an ex post examination of regulatory gambling

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  • Ramon P. DeGennaro
  • James B. Thomson
  • Robert A. Eisenbeis
  • ary

Abstract

This paper estimates the losses embedded in the capital positions of the 996 FSLIC-insured savings and loan institutions that did not meet capital standards at the end of the 1970s. We compare the estimated cost of resolving the insolvencies of these institutions at the end of the 1970s with the actual failure-resolution costs for those that were closed by July 3 1, 1992, and the projected resolution costs for the remaining thrifts that are likely to be closed. Our results show that even when one considers only the direct costs associated with delayed closure of economically failed thrifts, these costs significantly exceed reasonable estimates of the cost of prompt failure resolution.
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Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedhpr:421
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    References listed on IDEAS

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    1. Christopher J. Pike & James B. Thomson, 1991. "The RTC and the escalating costs of the thrift insurance mess," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
    2. 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 731-754, July.
    3. Kane, Edward J, 1990. " Principal-Agent Problems in S&L Salvage," Journal of Finance, American Finance Association, vol. 45(3), pages 755-764, July.
    4. John B. Shoven & Scott B. Smart & Joel Waldfogel, 1992. "Real Interest Rates and the Savings and Loan Crisis: The Moral Hazard Premium," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 155-167, Winter.
    5. Patric Hendershott & Edward J. Kane, 1992. "Office Market Values During the Past Decade: How Distorted Have Appraisals Been?," NBER Working Papers 4128, National Bureau of Economic Research, Inc.
    6. Kane, Edward J & Unal, Haluk, 1990. " Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms," Journal of Finance, American Finance Association, vol. 45(1), pages 113-136, March.
    7. Ramon P. DeGennaro & Larry H. Lang & James B. Thomson, 1991. "Troubled savings and loan institutions: voluntary restructuring under insolvency," Working Paper 9112, Federal Reserve Bank of Cleveland.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. 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.
    10. Kane, Edward J., 1986. "Appearance and reality in deposit insurance: The case for reform," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 175-188, June.
    11. Avery, Robert B & Belton, Terrence M & Goldberg, Michael A, 1988. "Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 597-610, November.
    12. Asli Demirgüç-Kunt, 1991. "Principal-agent problems in commercial-bank failure decisions," Working Paper 9106, Federal Reserve Bank of Cleveland.
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    Cited by:

    1. William P. Osterberg & James B. Thomson, 1999. "Depositor-preference laws and the cost of debt capital," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 10-20.
    2. Edward J. Kane & Min-Teh Yu, 1994. "How Much Did Capital Forbearance Add to the Cost of the S&L Insurance Mess," NBER Working Papers 4701, National Bureau of Economic Research, Inc.
    3. William P. Osterberg & James B. Thomson, 1997. "Depositor preference legislation and failed banks' resolution costs," Working Paper 9715, Federal Reserve Bank of Cleveland.
    4. William P. Osterberg & James B. Thomson, 1994. "Underlying determinants of closed-bank resolution costs," Working Paper 9403, Federal Reserve Bank of Cleveland.
    5. Ramon P. DeGennaro & Larry H. Lang & James B. Thomson, 1991. "Troubled savings and loan institutions: voluntary restructuring under insolvency," Working Paper 9112, Federal Reserve Bank of Cleveland.
    6. Kane, Edward J., 1995. "Three paradigms for the role of capitalization requirements in insured financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 431-459, June.
    7. William P. Osterberg & James B. Thomson, 1994. "Depositor preference and the cost of capital for insured depository institutions," Working Paper 9404, Federal Reserve Bank of Cleveland.
    8. Ramon P. DeGennaro & Deborah L. Murphy, 2004. "Understanding 401(k) plans," FRB Atlanta Working Paper 2004-21, Federal Reserve Bank of Atlanta.
    9. James B. Thomson, 2010. "Cleaning up the refuse from a financial crisis: the case for a resolution management corporation," Working Paper 1015, Federal Reserve Bank of Cleveland.

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    Keywords

    Savings and loan associations;

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