Agency implications of inside ownership and the thrift crisis: An empirical analysis

Much has been written about the causes of the savings and loan crisis. This crisis is without parallel in American history, and the costs and policy implications of its resolution will be far-reaching. Most of the emphasis has been placed on deposit insurance and deregulation. While there is no doubt that the availability of low cost insured deposits and the expanded asset powers of thrifts were largely responsible for the savings and loan crisis, other significant factors remain to be explored. An analysis of ownership characteristics of savings institutions may offer some additional insight into thrift financial performance. This study analyzes the role of thrift ownership, its impact on the level of risk taken and the subsequent financial performance of the thrift. Specifically, this study briefly examines the differences in financial performance between mutual and stockholder-owned savings institutions. Emphasis is then focused on performing an empirical estimation of the relationship between inside ownership and thrift failure.;A predictive model of thrift failure is developed. Ownership type and the degree of inside ownership are then added to determine the relative significance of each in thrift failure. The empirical estimation is performed using a logit model. Individual firm financial ratios and ownership data for the five year period 1984-1988 are used.;The results indicate that inside ownership is significantly and positively related to the likelihood of thrift failure. Few conclusive comments can be made, however, in comparing the probability of failure between mutual and stockholder-owned thrift institutions.;Given the contingent liability placed on the American Public by deposit insurance, there is considerable interest in reregulating the industry. If the industry is to be reregulated, there are many decisions to be made concerning which policies are to be altered, which are to be deleted, and which may need to be added. The results of this study may provide valuable information that can be used in debating regulatory policy changes in ownership requirements, capital standards and portfolio risk.