Thrift Industry:

Cost to FSLIC of Delaying Action on Insolvent Savings Institutions

GGD-86-122BR: Published: Sep 9, 1986. Publicly Released: Sep 9, 1986.

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In response to a congressional request, GAO provided information on: (1) the cost to the Federal Savings and Loan Insurance Corporation (FSLIC) of permitting insolvent thrift institutions to remain open instead of closing them immediately; and (2) the risk of losses on bad loans and investments incurred in closing such institutions.

GAO noted that, although the Federal Home Loan Bank Board (FHLBB) believes that credit risk is a serious problem that could significantly increase the FSLIC cost of liquidating financially troubled institutions, it was unable to estimate the precise extent of credit risk problems in troubled institutions' portfolios. GAO found that: (1) the number of insolvent thrifts grew steadily between 1982 and 1985; (2) the market value of thrift portfolios steadily increased due to the downward movement of market interest rates; (3) the most recent and largest thrift failures resulted from credit risk problems; (4) credit risk is a problem in institutions currently receiving FSLIC assistance; (5) FSLIC may lose over $1.4 billion from warehousing 367 thrifts from December 1985 to December 1987 if interest rates do not change by the end of 1987; and (6) FSLIC may experience continued savings only if interest rates fall.

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