The 1985 Ohio Thrift Crisis, the FSLIC's Solvency, and Rate Contagion for Retail CDs

Authors

  • ELIZABETH S. COOPERMAN,

  • WINSON B. LEE,

  • GLENN A. WOLFE

    Search for more papers by this author
    • Cooperman is from the University of Baltimore, Lee is from Purdue University, and Wolfe is from the University of Toledo. We are particularly grateful to Warren Bailey, David Blackwell, Richard Brown, David Cather, Robert Cooperman, Mary Dehner, John Feid, Greg Filbeck, Everson Hull, Steve Isberg, Edward Kane, David Kidwell, Joseph McKenzie, Greg Neuhaus, Romelle Roeske, Steve Skomp, Lewis Spellman, James Sullivan, Ralph St. John, and Mark Wheeler for their help and suggestions. We also wish to thank participants in finance seminars at the University of Alabama, University of Baltimore, University of Cincinnati, University of Colorado, Denver, University of Georgia, Memphis State University, Purdue University, and the University of South Carolina. This research was supported by a grant from the Office of Thrift Supervision (formerly the FHLBB) and summer faculty research grants from the University of Baltimore and Bowling Green State University. The views of this paper are those of the authors and not necessarily those of the Office of Thrift Supervision.

ABSTRACT

This paper uses both an ARIMA transfer-function intervention model and a panel data analysis to examine the effect of the Ohio deposit insurance crisis in 1985 on the pricing of six-month retail certificates of deposit (CDs) for federally-insured Ohio banks and savings and loans. Adjusting for pricing reactions due to changes in market rates, we find a significant, unanticipated rise in CD-rate premiums on the initial event week of the crisis that continued for approximately seven weeks. Consistent with a contingent insurance guarantee hypothesis, rate premiums are found to be risk based.

Ancillary