INTEREST RATES ON MORTGAGES AND DIVIDEND RATES ON SAVINGS AND LOAN SHARES

Abstract

WHAT IS THE RELATIONSHIP between higher yields on a financial institution's earning assets and consequent increases in its dividend or deposit rates? Recent literature dealing with the behavior of savings institutions (primarily savings and loan associations) has contained numerous references to the insensitivity of their dividend rates in response to increases in interest rates on their long-term earning assets (mainly mortgages).' A primary explanation of this insensitivity is that the interest rate only rises on the additional mortgages purchased, while the higher dividend rate applies to all shares. Since the additional mortgages are a relatively small proportion of total mortgage holdings, it is pointed out that the average rate of return on an S & L's portfolio will only increase by a small percentage of the increase in the mortgage interest rate, so that there will be little incentive for the S & L to raise its dividend rate.2