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Deposit Demand, "Hot Money," and the Viability of Thrift Institutions

  • Economics


Deposit Demand, "Hot Money," and the Viability of Thrift Institutions WILLIAM E. GIBSON Brookings Institution Deposit Demand, ''Hot Money, and the Viability of Thrift Institutions RECENT TRENDS in financial markets have stirred fears about the ability of thrift institutions in the United States-savings and loan associations and mutual savings banks-to survive and prosper. Although these insti- tutions constituted the fastest growing segment of the financial system from 1947 to the mid-1960s, their spectacular prosperity has dimmed since then as markets have become increasingly volatile. More and more they have experienced deposit drains, and no relief seems in sight. Accordingly, many knowledgeable observers question the prospects of these institutions as now constituted and regulated. Virtually every plan for general reform of the financial system implicitly or explicitly assumes some alteration in the powers of the thrift institutions if they are not to suffer serious deterioration. This assumption pervades the analysis and recommendations of the Hunt Commission: Note: Andrew Carron, Eric Pookrum, and Melba Wood assisted with the computa- tions in this paper. Helpful comments were contributed on an earlier version at a seminar at the University of Oregon. 593 594 Brookings Papers on Economic Activity, 3:1974 Thus, even if monetary policy is used more moderately, the problems of liquid- ity and solvency encountered by financial institutions could be as severe as those experienced during 1966, 1969 and 1970. Modifications in the structure and regu- lation of the financial system are urgently needed.... Without changes in their operations, there is serious question about the ability of deposit thrift institutions to survive.1 A similar concern was voiced by Irwin Friend in his "Summary and Recommendations" in the Federal Home Loan Bank Board's Study of the Savings and Loan Industry: For the savings and loan industry, a prolonged period of infl

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