EFFECTS OF DEREGULATION ON FAILING THRIFT INSTITUTIONS

The purpose of this paper is to test the hypothesis that much of the decline in the net worth of the failing savings and loan institutions was a result of deregulation. Variables are developed to represent major actions to deregulate S&Ls activities and to measure the impacts on institutions' net worth. A mixed cross-section/time series analysis is developed to estimate the effects of financial deregulation on failing thrifts' net worth. The data are 1984-89 balance sheet and income statement data for thrift institutions, prior to the enactment of the 1989 legislation to solve the crisis. The results of the analysis indicate that deregulation of asset and deposit activities was not the cause of the financial distress of failing US thrift institutions. The primary cause appears to be the increase in the federal deposit insurance limit to $100 000 and how attractive this legislative action made brokering deposits that became insured up to $100 000.