Principals,Agents,and the Impact of Regulatory Federalism on the Savings-and-Loans Crisis of the 1980s

Abstract

Was state financial regulation a major cause of the massive savings and loan (S&L) failures in the late 1980s? This question is critical at a time of continuing devolution of regulatory authority to the states. We employ a database of information on nearly 4,000 S&Ls in this period to understand the factors that led some of them to fail. We find that state-chartered S&Ls failed at higher rates than federally chartered firms, but that the extremely high failure rate of Texas-chartered S&Ls explains all of this difference. The actions of a single, large state can make an enormous difference in the American federal system of regulation. We also find that stock-owned S&Ls failed at a higher rate than mutually owned S&Ls, and that S&Ls chartered in jurisdictions with more autonomous regulatory structures failed at a higher rate. Thus, when the principal-agent relationship in S&L regulation was weakest, S&L failures were most prevalent.