The Continued Interest Rate Vulnerability of Thrifts
Patric H. Hendershott
James D. Shilling
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
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