Requiem for a Regulator: The Office of Thrift Supervision's Performance During the Financial Crisis

Abstract

We evaluate evidence reflecting the stability of our multi-regulator, charter-competitive system of financial regulation during the financial crisis in this symposium essay. Specifically, we compare thrifts to banks, charter-switchers to other thrifts and banks, and bailout recipients to non-bailout recipients to discover if any of these institutions did poorly when compared to their peers during the financial crisis. First, we compare publicly traded thrifts to publicly traded banks during 2008 - the critical year of the crisis - and find that thrifts fared only marginally worse than banks, if at all, during that year. This result modestly suggests that the multi-regulator regime, however illogical, did not concentrate instability in a particular industry subject to a weak regulator. Second, to evaluate the impact of competition for charters, we compare thrift and bank performance to those institutions that chose to switch regulators immediately before and during the financial crisis. We find no significant differences in returns among either institutions that converted their federal bank charters to federal thrift charters, or institutions that converted federal thrift charters to bank charters, although our samples of these institutions are small. Third, we examine the bailout propensity of these charter-switchers. Our results suggest that although institutions switching to thrift charters were big enough to receive bailout money from the government, they did not. Conversely, we find that institutions switching away from thrift charters received more bailout money than their size would suggest. Our final finding may suggest some (possibly misplaced) dissatisfaction with the performance of the federal thrift regulator among federal government officials, which may have contributed to the decision to eliminate it in the Dodd-Frank Financial Reform Act passed in the wake of the crisis.