Unexpected increases in interest rates during the early 1980s and decreases in asset quality in the late 1980s caused massive losses throughout the savings and loan industry. Insolvency was common, if not the rule. But because of bureaucratic forbearance, funding constraints, and federal deposit...

This paper studies at the forbearance bet taken by policy makers at the end of the 1970s. We define forbearance as the failure of regulators to enforce book capital standards at the end of 1979. By comparing the cost of prompt regulatory intervention (defined here as closure or reorganization of...