Paul M. Horvitz

The Role of Forbearance and its Costs in Handling Troubled and Failed Depository Institutions

The banking regulatory agencies have had, up to now, very wide discretion in the handling of troubled banks and thrifts. This could range from increased examination frequency to informal supervisory agreements to formal cease-and-desist actions to declarations of insolvency. The latter step would be followed by liquidation of the bank or sale to a buyer willing to recapitalize it. In some cases the FDIC has assisted in the recapitalization of the bank without a declaration of insolvency (open-bank assistance).

Forbearance: An empirical analysis

Several recent articles have analyzed conditions under which allowing capital-deficient banks to continue to operate may be optimal policy. This article examines the performance of banks admitted into the FDICs Capital Forbearance Program between 1986 and 1989 and finds that, for the majority of these banks, there was no substantial improvement in their capital ratios. We use a logit regression analysis to attempt to identify those banks whose financial condition improved with forbearance and find that banks which did improve are not clearly identifiable from pre-forbearance financial data. Instead, the banks which improved did so due to infusions of new capital, extraordinary income, and improvements in the local economies, factors which are not easily identifiable ex ante by regulators. The conclusion is that, while some grants of forbearance may result in large saving to the FDIC, in the majority of cases granting forbearance to troubled banks is unlikely to reduce the expected loss to the deposit insurer.

Banking Regulation as a Solution to Financial Fragility

The purpose of this article is to evaluate the role of government regulation dealing with the risk that fragility of the financial structure may lead to a collapse of the system. Other papers presented at this conference deal with the possible sources of such a collapse—the payments system, international connections, or derivative securities—and with the likelihood that the system is fragile, and the extent to which private solutions maybe adequate to deal with the problem.

Abnormal Returns in Post-FIRREA Acquisitions of Failed Thrifts

Previous studies have found that positive abnormal returns accompanied announcements that a firm had acquired a failed savings and loan association from the FSLIC. The FIRREA legislation of 1989 resulted, in part, from criticism of some transactions negotiated by the FSLIC, and turned responsibility for such transactions over to the RTC. This study finds that announcements of acquisitions of failed S&Ls in the post-FIRREA period have not been accompanied by positive abnormal returns. The returns to non-assisted acquirers of solvent S&Ls during this period were generally negative, and while they were not significantly different from zero, they were significantly different from the returns to the acquirers of failed thrifts.

Commercial Banks and Real Estate Lending: The Texas Experience

This paper examines the performance of Texas commercial banks specializing in mortgage lending during the difficult times of the late 1980s and early 1990s to investigate how representative their experience as compared with that of banks concentrating in real estate lending across the country. The results show that Texas REBs performed very poorly during the 1980s and early 1990s, but this was because the Texas REBs were clearly different from the majority of the banks classified as REBs in the rest of the country. In contract to non-Texas real estate specializing banks, those in Texas banks put substantial assets into much riskier construction and development loans, and in loans on commercial property, such as office buildings, hotels and shopping centers. In a poor real estate market, these loans performed very poorly. The analysis indicates that the Texas experience is not a basis for rejecting the view that the commercial bank industry can safely replace the declining thrift industry as a major source of residential mortgage financing.

Mortgage Loans to Nonoccupants as an Indicator of Racial Redlining

Where racial redlining prevents potential residents of a neighborhood from obtaining mortgage loans, a greater number of houses will be sold to investors and a greter number of residents will rent homes owned by such investors. It may be possible, therefore, to measure the extent of redlining by using HMDA data on loans made to nonoccupants. This study models the flow of mortgage credit to nonoccupants in nine MSAs, using traditional economic and demographic variables and variables describing the racial composition of the neighborhood. The percentage of the census tract population that is black has a small but statistically significant coefficient in Los Angeles, Chicago, and Nashville, and the Hispanic population variable is statistically significant in Los Angeles, Chicago, Boston, and Albuquerque. The model explains a high percentage of the variation in mortgage lending to nonoccupants across census tracts and is robust with respect to alternative formulations of the dependent va riable, and the independent variables have the hypothesized signs.