Changing Asset/Liability Structure Of Savings Institutions In A Deregulated Environment

This paper examines how savings institutions have reacted to new asset/liability management powers granted under recent enabling legislation and regulation. The paper describes the rapid change in thrift liability composition that began with the money‐market deposit account (MMDA) in December 1982 and the increased interest‐rate risk that accompanied the subsequent shortening of liability maturities. Ironically, after deregulation, thrifts were structured even more into a mismatched position. After the massive thrift balance‐sheet mismatch is measured, strategies useful in reducing thrift interest‐rate risk exposure are evaluated in terms of size and immediacy of impact. Rather than reliance on minor balance‐sheet adjustments which mistakenly are taken for effective asset/liability management, a comprehensive strategic plan is recommended The critical point is that the savings institution manager cannot effectively speculate on interest‐rate movements until the firm is fully restructured to eliminate its borrow‐short/lend‐long posture. In contrast to that of other observers, this analysis suggests that immediate and meaningful reductions in interest‐rate risk exposure can be achieved by lengthening liabilities through amount and frequency of liability pricing. Neither technical hedging programs nor alternative mortgage‐loan instruments (AMLs), as now structured, are likely to provide the magnitude or speed of adjustment necessary to correct the existing balance‐sheet mismatch, nor are they appropriate single‐tactic strategic responses