The Determinants of Efficiency and Solvency in Savings and Loans

We study the efficiency and solvency of savings and loans institutions (thrifts). Thrifts that were inefficient (according to a nonparametric measure) were 4 1/2 times more likely than efficient thrifts to fail in the future. We also find that absent controls for lines of business pursued, stock institutions were both less efficient and more likely to fail than mutuals. With controls, these results are reversed. A consistent explanation is that stock institutions are better at resolving the standard agency conflict between owners and managers, but worse at resolving the "asset-substitution" conflict between shareholders and debtholders (depositors). Last, we find that some lines of business deregulated by the Garn-St. Germain Act adversely affected efficiency and solvency.