RISK-TAKING AND FAILURE IN DE-NOVO SAVINGS AND LOANS IN THE 1980S

This article examines failure rates in de novo S&Ls that initiated ope rations during the 1980-1986 period. Overall failure rates are similar to those for existing institutions but are found to vary significantl y by location, time of charter, and organizational form. Both univaria te tests and results from a probability-of-failure model indicate that inadequate capital, economic stress, poor management of higher risk l ending allowed by broader powers, and operating inefficiencies contrib uted significantly to the likelihood of failure. Use of brokered funds and rapid asset growth are also significantly related to failure like lihood. interestingly, for those S&Ls which eventually failed, rapid a sset growth and high proportions of nonperforming assets actually dela yed the timing of their failure. We interpret this to be the result of regulatory forbearance. We also find significant differences between the financial characteristics of de novo and non-de novo S&Ls.