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

Randall S. Kroszner and Philip E. Strahan
The Journal of Finance
Vol. 51, No. 4 (Sep., 1996), pp. 1285-1319
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329395
Stable URL: http://www.jstor.org/stable/2329395
Page Count: 35
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Abstract

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.

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