Determinants of Thrift Institution Resolution Costs





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    • James R. Barth is the Lowder Eminent Scholar in Finance, Auburn University. Philip F. Bartholomew is a Principal Analyst, Congressional Budget Office. Michael G. Bradley is a Financial Economist, Office of Thrift Supervision. The authors would like to thank R. Avery, M. Flannery, and the staff of the Office of the Chief Economist, Office of Thrift Supervision for helpful comments. Special thanks to R. Brumbaugh, who provided invaluable advice, and D. Whidbee, who provided invaluable research assistance, without whose efforts this project would have gone uncompleted. Finally, thanks to R. Roeske for skillful editing and R. Joyner, S. McLeod, and A. Mills for their patience and great typing skills. The usual caveat concerning errors applies. The views expressed are those of the authors and not necessarily those of the Congressional Budget Office or the Office of Thrift Supervision.


This paper provides a detailed examination of the cost imposed by thrift institutions resolved during the period 1980–1988. A simple model is presented to explain the cost of resolution. This model is tested empirically with a comprehensive data set that permits us to avoid some of the econometric problems present in earlier studies. The empirical evidence suggests that the model that explains resolution costs in the late 1980s is significantly different from the model for either the middle or early 1980s. This evidence is consistent with the changing nature of the thrift crisis and changes in the regulator's closure rule. Our econometric evidence, moreover, is consistent with the hypothesis that, for troubled institutions, tangible net worth systematically understates market-value net worth. In addition, the importance of including time effects as well as institution effects as determinants of the cost of resolution is revealed.