Federal regulators characterize capital forbearance as an efficient way of nursing weak banks and thrifts back to health. An alternative hypothesis is that forbearance reflects inefficient costs of agency that fall on federal deposit-insurance funds. Divergences between regulatory measures of a...

Federal regulators characterize capital forbearance as an efficient way of nursing weak banks and thrifts back to health. An alternative hypothesis is that forbearance reflects inefficient costs of agency that fall on federal deposit-insurance funds. Divergences between regulatory measures of a...

This paper uses a robust valuation model and data available in 1985-1989 to conduct a synthetic market-value accounting of the year-to-year opportunity cost of FSLIC forbearance. Although opportunity cost did not increase in every single year, it did increase on average over the period. Had...