The viability of the thrift industry

Abstract

The defining characteristic of a thrift institution is the statutory requirement that it hold a specified percentage of its assets in certain residential mortgage‐related instruments. Under new capital requirements and limitations on asset diversification, thrifts must earn a higher return on their mortgage assets, without taking on additional default risk or interest rate risk. The study uses a new empirical model to compute expected profitability, adjusted for risk, and concludes that expected returns from mortgage investment are inadequate to provide a market rate of return on required equity. Thrifts therefore should not be required to invest in home mortgage loans. If the existing requirement is preserved, the industry will experience impaired profitability, rising insolvencies, and continuing attrition.

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