Were S&L Financial Statements Misleading? Some Evidence And Policy Prescriptions

Abstract

The savings and loan (S&L) crisis was alleged to be caused in part by regulatory accounting practices.  These accounting methods allowed some S&Ls to improve their apparent financial health, when in fact these S&Ls were in poor financial condition.  In an experimental setting, this paper finds that potential depositors were mislead by RAP statements causing them to make suboptimal deposit decisions.  These results have both practical and policy implications for government regulators, management, and depositors.