Unitary Thrifts: a Performance Analysis

Title IV of the Financial Services Modernization Act of 1999 closed an important loophole in U.S. banking law: the unitary thrift holding company exemption from laws that prevented the mingling of banking and commerce.1 The loophole had allowed nondepository institutions, including nonfinancial corporations, to own unitary thrift holding companies (UTHCs). Only depository institutions could own multiple bank and thrift holding companies or unitary bank holding companies. The period over which the exemption was in force provides us with the opportunity to examine the implications of commingling banking and commerce. The focus of this paper is a comparison of the performance of thrifts in UTHCs with that of other thrifts. Because little stock market data on UTHCs is available, this study constructs performance measures using balance sheet and income statement data from Thrift Financial Reports.2 Overall, we find important differences between UTHC subsidiaries and other thrifts. UTHC thrifts tend to outperform other thrifts during the sample period studied. Moreover, UTHC thrifts appear to have more diversified revenues streams, loan and asset portfolios, and funding sources than do nonUTHC thrifts. Furthermore, differences do not suggest UTHC thrifts pose a greater risk to the federal financial safety net; UTHC thrifts produce similar returns on book equity as non-UTHC thrifts but with higher levels of capitalization. Therefore, we find no evidence consistent with a need to close the UTHC loophole, which could reduce the contestability of banking markets. Overall, these results suggest that some limited commingling of banking and commerce might not pose undue risks to the federal financial safety net. But because thrifts have limited commercial lending powers, these results must be interpreted cautiously when evaluating less restrictive environments.