An ecology of agency arrangements: mortality of savings and loan associations, 1960-1987

Administrative Science Quarterly, Sept, 1992 by Hayagreeva Rao, Eric H. Nielsen

Hypothesis 2: Environmental variability has stronger positive effects on the mortality of mutuals than of stocks.

Factors Reducing Structural Differences between Mutuals and Stocks

The hypotheses above presume that structural differences exist between mutuals and stocks. Although transaction and technological differences between mutuals and stocks are endorsed and safeguarded by regulatory agencies, the boundaries between mutual and stock SLAs can be made less distinct by blending processes. Hannan and Freeman (1989) discussed several blending processes that erase the differences between organizational forms. In the SLA population, two blending processes appear to be important: coercive isomorphism and deregulation.

In coercive isomorphism, a powerful external agency imposes organizational structure and reduces structural variety among potentially divergent forms (DiMaggio and Powell, 1983). Coercive isomorphism is likely in the SLA population because all SLAs are chartered and regulated by either the FHLBB (reconstituted in 1989 as the Office of Thrift Supervision) or by state-level regulatory agencies. The potential therefore exists for regulatory agencies to require both mutuals and stocks to adopt practices that compensate de facto for any differences in the viability of their monitoring arrangements and capital structures. Thus, the disbanding rate of SLAs could be a function of the agency that regulates them rather than their internal organizational structure. Moreover, regulatory agencies, as guardians of trust, differ in their ability to monitor organizations and prevent failures (Mitnick, 1984; Shapiro, 1987).

Federal and state-level regulators not only differ in their administrative capacity but also vary in the asset powers they grant to SLAs. State regulators and federal regulators compete in a market for charters, and state regulators are more likely to be lax in their regulation and confer broader asset powers to all SLAs (Balderston, 1985; Strunk and Case, 1989). In a study of 205 insolvencies, Barth, Bartholomew, and Labich (1989) found that a disproportionate number of failed thrifts consisted of state-chartered SLAs and that initial investigations also uncovered significant contraventions of regulations and malfeasance. Therefore, the following hypothesis needs to be examined:

Hypothesis 3: State-chartered SLAs will encounter higher mortality than federally chartered SLAs.

Another blending process was the deregulation of the SLA industry from 1980 onward, which dramatically altered the asset powers, opportunities, and incentives of SLA managers to take risks. Prior to 1980, SLAs had restricted asset powers, limited opportunities to secure resources because of Regulation Q, which enabled them to pay a higher rate of interest than banks, and limited incentives to take risks because of stable interest rates and the absence of competitors such as mortgage bankers and money-market mutual funds. New SLAs were founded only in unprovided areas (Strunk and Case, 1989). The regulatory edifice began to crumble slowly, beginning in 1974, with the chartering of stock SLAs by federal regulators, the growth of a secondary market for mortgages, the diffusion of Negotiable Order of Withdrawal (NOW) accounts, and the erosion of the tax advantages enjoyed by SLAs (Woerheide, 1984). Moreover, interest rates were relaxed in 1978 and as a result, SLAs were able to offer money-market certificates with a minimum denomination of $10,000 at market interest rates. By 1979, these money-market accounts constituted 20 percent of all the total deposits at thrifts.