Cost Inefficiency and the Holding of Nontraditional Assets by Solvent Stock Thrifts
Posted: 16 Oct 1998
In contrast to greater restrictions on thrifts' nontraditional assets under FIRREA, Congress is considering new legislation forcing thrifts to convert to banks. Hence, the efficiency implications of product diversification for thrifts is an important issue. We examine the relation between thrifts' movement into nontraditional assets and the operating inefficiency of adequately capitalized stock thrifts in 1988 and 1994. We estimate inefficiency scores for individual thrifts for each respective year using a stochastic cost frontier methodology. In a second step, we regress these scores against measures for movement into nontraditional assets. We find a significant fall in inefficiency with a rise in holdings of both traditional and nontraditional assets. Our results suggest that greater diversification privileges for thrifts should be beneficial to the health of the industry.
JEL Classification: G21, G28
Suggested Citation: Suggested Citation