IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/4701.html
   My bibliography  Save this paper

How Much Did Capital Forbearance Add to the Cost of the S&L Insurance Mess

Author

Listed:
  • Edward J. Kane
  • Min-Teh Yu

Abstract

Federal regulators characterize capital forbearance as an efficient way of nursing weak banks and thrifts back to health. An alternative hypothesis is that forbearance reflects inefficient costs of agency that fall on federal deposit-insurance funds. Divergences between regulatory measures of a troubled institution's net worth and GAAP and market-value measures relieved FSLIC from having to book de facto encumbrances that industry losses were imposing on the FSLIC fund. This omission protected the reputations and careers of top officials. Delays in insolvency resolution intensified FSLIC exposure to future losses by distorting management and risk-taking incentives and squeezing profit margins for surviving thrifts. Besides accumulating projects with negative net present value, delay hurt FSLIC indirectly by undermining the average profitability of the industry it insured. This paper seeks to measure the opportunity cost of FSLIC forbearance during 1985-1989. Although the opportunity cost of delay did not increase every year, it did increase on average. Had opportunity-cost standards of capital adequacy been routinely enforced, FSLIC guarantees would not have displaced private capital on a mammoth scale, surviving members of the industry would have proven more profitable, and investments in commercial real estate would have been restrained.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:4701
    Note: CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w4701.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. George G. Kaufman, 1987. "Bank Capital Forbearance And Public Policy," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 84-91, January.
    2. Elijah Brewer, 1987. "The current magnitude of the problem in the S&L industry," Proceedings 160, Federal Reserve Bank of Chicago.
    3. Ramon P. DeGennaro & James B. Thomson, 1992. "Capital forbearance and thrifts: an ex post examination of regulatory gambling," Working Paper 9209, Federal Reserve Bank of Cleveland.
    4. Kane, Edward J. & Min-Teh Yu, 1995. "Measuring the true profile of taxpayer losses in the S & L insurance mess," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1459-1477, November.
    5. 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.
    6. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-1242, September.
    7. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    8. 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.
    9. Edward J. Kane, 1987. "DANGERS OF CAPITAL FORBEARANCE: THE CASE OF THE FSLIC AND "ZOMBIE" S&Ls," Contemporary Economic Policy, Western Economic Association International, vol. 5(1), pages 77-83, January.
    10. Rebel A. Cole, 1993. "When are thrifts closed? An agency-theoretic model," Finance and Economics Discussion Series 93-37, Board of Governors of the Federal Reserve System (U.S.).
    11. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
    12. Lawrence J. White, 1990. "Problems Of The Fslic: A Former Policy Maker'S View," Contemporary Economic Policy, Western Economic Association International, vol. 8(2), pages 62-81, April.
    13. Dennis E. Bennett & Roger Lundstrom & Donald G. Simonson, 1986. "Estimating portfolio net worth values and interest rate risk in savings institutions," Proceedings 116, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • K2 - Law and Economics - - Regulation and Business Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4701. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.