The Impact of the Financial Institutions Reform, Recovery and Enforcement Act on the Risk of Savings Institutions

Jeff Madura and Marilyn K Wiley

The Financial Review, 2000, vol. 35, issue 3, 145-68

Abstract: The Financial Institutions Reform, Recovery and Enforcement Act (HRREA) of 1989 was intended to enhance the safety of savings institutions. We develop and test a model showing how institution-specific characteristics modify the overall effect of FIRREA on the risk of savings institutions. Our model incorporates market risk, interest rate risk, and exposure to real estate conditions. We find that risk shifts vary across savings institutions. Larger institutions exhibit no obvious shift in risk, while smaller institutions show reduced risk since FIRREA. Moreover, the effects are more favorable for institutions that maintained higher capital levels in response to FIRREA's provisions. Copyright 2000 by MIT Press.

Date: 2000
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