The Continued Interest Rate Vulnerability of Thrifts

Patric Hendershott and James D. Shilling

No 3415, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The 1980s S&L debacle is generally viewed as the result of: (1) sharply rising interest rates eliminating the net worth of thrifts funding fixed-rate loans with short-term deposits and (2) thrifts responding by taking even greater interest-rate and credit risks. The question investigated in this paper is how vulnerable do thrifts remain to an interest rate experience like that which triggered the 1980s S&L debacle? The short answer is that thrifts are even more vulnerable in 1989 than they were in 1977. The dollar volume of fixed-rate mortgages funded by short-term deposits in 1989, $400 billion, is slightly greater now than it was in 1977, and thrifts have also put over $325 billion of adjustable-rate loans with rate caps on their balance sheets. A sharp rise in interest rates (the one-year Treasury rate rose by 9 percentage points between 1977 and 1981) would cause significant losses on these capped loans, as well as on the fixed-rate loans.

Date: 1990-08
Note: ME
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Published as Financial Crises, Hubbard, editor. Chicago: University of Chicago Press, 1992,pp. 259-282.
Published as The Continued Interest-Rate Vulnerability of Thrifts , Patric H. Hendershott, James D. Shilling. in Financial Markets and Financial Crises , Hubbard. 1991

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Chapter: The Continued Interest-Rate Vulnerability of Thrifts (1991)
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