The effect of charter status on savings and loan resolution costs

Abstract

Beginning in 1933, with the establishment of the first federally chartered savings and loan, the thrift industry has functioned under a dual regulatory system. This paper addresses the question of whether this moral hazard, created by regulatory competition, increased the resolution costs of state chartered institutions relative to the federally chartered thrifts. Resolution costs are those expended by the Resolution Trust Company (RTC) to handle a defunct thrift. This study shows, using a variety of methods and statistical tests, that the charter orientation of a defunct savings and loan had a significant effect on the resolution costs associated with the handling of the thrift by the RTC. Therefore, it can be stated that this dual regulation of the savings and loan industry created a moral hazard in which there were incentives for regulators to provide broader investment powers and less strict regulation to attract thrifts. Because state regulators tended to provide less strict regulations, the resolution costs for defunct state chartered savings and loans were larger than for their federally chartered counterparts.