Predicting Failure of Savings & Loan Associations

Coleen C. Pantalone and Marjorie B. Platt

Real Estate Economics, 1987, vol. 15, issue 2, 46-64

Abstract: Early‐warning systems are intended to provide regulators with identification of problem institutions sooner than is possible with the present system of call reports and periodic on‐site examinations. Given an earlier indication of potential problems, resources can be focused on those institutions most in need of monitoring, thus potentially reducing both the number of failures and FSLIC financial assistance in the remaining failures. While some early‐warning systems were developed in the mid‐1970s for use by commercial bank regulators, very little attention has been focused on developing similar systems for the thrift industry. To address this issue, multiple discriminant analysis was used to develop an early‐warning system for savings and loan associations in the Boston district of the Federal Home Loan Bank system. The results suggest that use of this model would have given signals of impending trouble well before the actual failure occurred. Consequently, an early‐warning system could provide information to regulators sooner, permitting scarce resources to be allocated more effectively. In addition, earlier intervention could reduce the amount of FSLIC financial assistance required. By intervening earlier, FSLIC may be able to arrest the failure‐promoting activities in which the association is engaged.

Date: 1987
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