Form of ownership and risk taking in banking: Some evidence from Massachusetts savings banks

In recent years there has been interest in the impact of the form of ownership on the behavior of financial institutions. In the 1980’s, there was a substantial movement away from mutual ownership to stock ownership in the thrift industry. The effect of this conversion process on risk taking and efficiency has been a matter of concern. The purpose of this paper is to examine the experience of savings banks in Massachusetts. A panel of 115 savings banks is analyzed for the years 1985 through 1993, a period that includes both rapid growth and a subsequent severe cyclical decline in property values. The credit quality of loan portfolios is related to the size of the portfolio, the structure of the portfolio, and the ownership status of the bank. Several models are estimated. In all cases, it was found that the cyclical decline in property values resulted in a decline in the credit quality of loan portfolios with a substantially greater impact on those savings banks that converted from mutual to stock status.