The Impact of Federal Deposit Insurance on Savings and Loan Failures

This study empirically investigates the hypothesis that a higher real ceiling on federal deposit insurance leads to an increased failure rate for savings and loans (S&Ls). After providing a history of federal deposit insurance, a formal model is developed. The empirical analysis thereof examines both the percentage of federally insured S&Ls that failed and the number thereof that failed. The results were consistent for both sets of estimates. Among other things, the time-series estimates reveal that the S&L failure rate over the 1965-1989 study period were a decreasing function of the real price of imported crude oil, the mortgage portfolio yield, and the average capital-asset ratio. In addition, the S&L failure rate was found to be an increasing function of the cost of deposits, the volatility of the mortgage portfolio yield, recession, and, finally, the real ceiling per account on federal deposit insurance.