Regulatory Incentives and the Thrift Crisis: Dividends, Mutual-to-Stock Conversions, and Financial Distress




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    • Kroszner is from the Graduate School of Business, University of Chicago, and Strahan is from the Federal Reserve Bank of New York. We would like to thank James Barth, Lawrence Cordell, Douglas Diamond, Benjamin Esty, Mark Flannery, James Fleck, Peter Gutzmer, Charles Himmelberg, Beverly Hirtle, Paul Horvitz, Glenn Hubbard, George Kaufman, Ignacio Mas, Sam Peltzman, Alex Pollock, Lawrence Radecki, James Verbrugge, Robert Vishny, seminar participants at the University of Chicago, NBER Summer Institute, the Stockholm School of Economics, University of Texas at Austin, the Federal Reserve Banks of Chicago, New York, and Kansas City, and an anonymous referee for helpful comments, and Lawrence Cordell and James Fleck for conversion data. Thanks to Joanne Collins and James Weston for research assistance. The views expressed here do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.


During the 1980s, insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems. Lacking cash to close insolvent thrifts, regulators induced nearly $10 billion of private capital to flow into the industry through mutual-to-stock conversions. We test a theory of how regulators encouraged capital-impaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital. We estimate the costs of this policy and interpret the 1991 Federal Deposit Insurance Corporation Improvement Act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress.