Cost Inefficiency and the Holding of Non-traditional Assets by Solvent Stock Thrifts

In contrast to greater restrictions on thrifts' non‐traditional assets under FIRREA, Congress is considering new legislation forcing thrifts to convert to banks. Hence, the efficiency implications of product diversification for thrifts is an important issue. We examine the relation between thrifts' movement into non‐traditional assets and the operating inefficiency of adequately capitalized stock thrifts in 1988 and 1994. We estimate inefficiency scores for individual thrifts for each year using a stochastic cost‐frontier methodology. In a second step, we regress these scores against measures for movement into non‐traditional assets. We find a significant fall in inefficiency with a rise in holdings of both traditional and non‐traditional assets. Our results suggest that greater diversification privileges for thrifts should be beneficial to the health of the industry.