Troubled Savings and Loan Institutions: Turnaround Strategies Under Insolvency

Ramon Degennaro, Larry Lang and James Thomson

Financial Management, 1993, vol. 22, issue 3

Abstract: Unexpected increases in interest rates during the early 1980s and decreases in asset quality in the late 1980s caused massive losses throughout the savings and loan industry. Insolvency was common, if not the rule. But because of bureaucratic forbearance, funding constraints, and federal deposit insurance, hundreds of insolvent thrifts continued to operate. This is because regulatory agencies were unwilling or unable to close thrift institutions immediately upon insolvency. Instead, they progressively reduced the thrift capital requirement and later refrained from enforcing that requirement in the hope that the industry would recover. Coupled with deposit insurance and the expanded investment and lending powers granted to the industry in the early 1980s, this regulatory forbearance gave thrift managers the opportunity to pursue strategies to turn around their firms, to regain profitability and to restore adequate capital levels.

Date: 1993
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