Cost studies of the savings and loan industry

This dissertation consists of two separate papers: the first deals with deposit interest rate controls on savings and loan associations (S&Ls) and the second is an economies of size study of the savings and loan industry;Deposit rate controls on deposits have been imposed upon S&L associations since 1966 when S&Ls found it difficult to compete with both commercial banks and the open market for deposit funds. Because S&Ls hold primarily long-term, fixed-rate assets (home mortgages) it is difficult for them to quickly increase the rates they pay to depositors (in the event that this becomes necessary). The rather rapid increases in interest rates in the mid-1960s proved to be too much of a competitive disadvantage for the S&Ls; hence, deposit rate controls were placed on S&L deposits and a more stringent policy was developed toward the already existing rate controls on commercial banks. All of this activity was designed to reduce deposit competition among the various financial institutions;Now, in 1980, legislation has been passed which will phase out these deposit rate controls over the next six years. To lend insight into the current, past, and future problems of S&L associations with respect to their ability to compete in a dynamic financial environment, this first paper provides a historical look at both the S&L industry and the deposit rate controls themselves. This part also examines the recent financial position of all federally insured S&Ls in an effort to gain knowledge of their current financial condition. Finally, Part I examines some recent developments effecting the S&L industry and suggests some changes which could be made so that S&Ls could more effectively compete in the financial environment of the 1980s;The second part of the dissertation is an economies of size study of the S&L industry. This paper examines the relationship between average operating expenses and firm size by estimating a cubic total cost function for the S&Ls in the New York City, Los Angeles, Chicago, and Philadelphia market areas. The resulting average cost functions indicate the presence of both economies and diseconomies of size.