In the aftermath of the real estate slump and the attendant financial troubles of the New England banks, it is natural to look for causes and contributing factors. One phenomenon that has received its share of the blame is the rush of conversions by thrifts in the mid 1980s from mutual to stock form of ownership. Conversions were hailed initially as a way to fortify the eroded capital of thrifts and increase their safety and soundness.

This article compares the behavior of converted thrifts with that of the mutuals. It finds that converted institutions took greater risks, suffered bigger losses, and failed at a higher rate than the mutuals despite being very highly capitalized after conversion. Three conclusions are reached. First, converted thrifts accounted for a substantial share of the increase in real estate financing during the boom of the mid 1980s. Second, ability to take greater risk, rather than efficiency, appears to have been a dominant motive for thrift conversions in New England. And third, even very high capital ratios may not prove sufficient if an institution takes big risks in its loan portfolio.