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| Thrifty Viability and Traditional
Mortgage Lending: A Simultaneous Equations Analysis of the Risk-Return Trade-Off Author: M. Cary Collins, Van Son Lai, and James E. McNulty Start Page: 155 Abstract: A number of studies
have argued that the thrift industry is not viable as it is presently structured and
regulated because mortgage yields are inadequate to cover interest and operating costs.
This hypothesis suggests that observed profitability is primarily the result of the
tendency of the industry to "ride" the yield curve by borrowing short and
lending long. To evaluate this argument, we construct a simultaneous-equations model of
thrift risk (maturity gap positions) and return (net interest margin). We find support for
the notion that the industry could not be reasonably profitable if it did not take on
significant interest-rate risk. For instance, a zero gap position produces a return on
assets of only 19 basis points and a return on equity of only 4%. We also estimate the
amount of interest-rate risk the industry can employ to increase returns on equity and
assets. Our estimates show that over 50% of thrift profits earned during this period are
the result of negative gap positions and interest-rate speculation. As earlier research
shows, changes in regulations affecting thrift asset and liability choices can be
counterproductive. |
