RISK TAKING BY THRIFT INSTITUTIONS: A FRAMEWORK FOR EMPIRICAL INVESTIGATION
DEVRA L. GOLBE
The discussion surrounding the recent reregulation of the thrift industry suggests that (i) thrifts engaging in "risky" activities are more likely to become insolvent and that (ii) thrifts already near insolvency are likely to take on more risks resulting in increased loss. This paper considers the relationship between insolvency and risk taking in a simultaneous framework and uses 1978-1983 data for Illinois thrifts to investigate the relationship. The paper explores the likelihood that risk taking by thrifts increases as the probability of insolvency increases, that risk taking increases as the probability of failure (i.e., closure by the regulator) increases, and that the probability of insolvency increases as risk taking increases. Preliminary empirical results suggest that an increase in the probability of insolvency increases risk taking and that an increase in risk taking increases the likelihood of insolvency. This latter result is (statistically) significant only when one measures risk by an index of diversification. If sustained in more extensive testing, this result implies that regulatory restrictions on asset diversification are counterproductive. Copyright 1991 Western Economic Association International.
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.