Essay about Business: Savings and Loan Association and Credit Union

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Financial Institutions, Markets, and
Money, 9th Edition
Authors: Kidwell, Blackwell, Whidbee &
Peterson
Prepared by: Babu G. Baradwaj, Towson University
And
Lanny R. Martindale, Texas A&M University

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CHAPTER 17
THRIFT INSTITUTIONS
AND FINANCE
COMPANIES

Institutions Covered
Thrift Institutions
Savings Associations (or S&Ls)
Savings Banks
Credit Unions

Finance Companies

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Historical Origins of Thrifts
Mutual Savings Banks were developed in the
1800s because commercial banks did not serve the needs of small savers.
Eventually Mutual Savings Banks invested most of their deposits in mortgage loans.
Mutual Savings and Loan Associations and
Building Societies were also started in the 1800s by groups of people who pooled their savings so that each would eventually be able to acquire a house. Copyright© 2006 John

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Recent History of Thrifts
Stockholder-owned savings and loan associations were relatively uncommon until the late 1970s and
1980s when pressure to attract more capital encouraged many mutual S&Ls to convert to stock form. Stock S&Ls outnumber mutuals today.
Assets of stock S&Ls are many times as large as the assets of mutual S&Ls.

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Exhibit 17.3A: Number of Thrift Institutions

Source: Office of Thrift Supervision, 2003 Fact Book, May 2004.

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Exhibit 17.3B: Assets of Thrift Institutions

Source: Office of Thrift Supervision, 2003 Fact Book, May 2004.

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Thrift Crisis of the 1980s
Classic model of thrift management involved a negative maturity GAP:
Short-to-medium term fixed-rate savings deposits financing Medium-to-long-term fixed-rate mortgages
Thus the sharp interest rate increases of the early 1980s decimated the industry
The problem was compounded by unsound lending practices and other forms of mismanagement

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Regulation of Thrifts
Savings bank regulators—
Federal regulator: Office of Thrift Supervision
Insurer: FDIC-SAIF
Savings association (S&L) regulators—
Federal regulator: OTS
Insurer: FDIC-either subsidiary, depending on prior election State regulators also charter and supervise thrifts
Federal Home Loan Banks: 12 regional Federal Home
Loan Banks empowered to borrow in capital markets and make loans (called “advances”) to thrifts in their regions.
Regulatory powers mostly transferred to OTS. Banks still in place but Federal Home Loan Bank Board abolished in 1989

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Assets of Thrifts
Residential mortgages still main asset (about
47%) because of tax break
Other loan types about 21% of industry assets
Liquidity management comparable to commercial banks “OREO”— Other Real Estate Owned—acquired in foreclosures
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Liabilities of Thrifts
Deposits are key, but deposit types are much more varied today
Advances from FHLB are most important nondeposit source of funds
Fed funds present but less important as either source or use compared to banks
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Capital Accounts, Standards & Terms analogous to banks Tier 1/ Tier 2
Risk-weighting of assets
Minimum ratios

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Income, Expenses, & Performance
Structure of income statement comparable to banks
Net Interest Margin about 3%,; below commercial banking but stable deposit rates have fallen more rapidly than mortgage rates institutions take much less interest rate risk than they used to Provision for loan losses reflects sounder lending practices Industry ROAA averages around 1.3%; ROAE around 14%.
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Credit Unions
Mutual institutions organized much like a club with each member(share owner) having a vote to elect the board of directors.
Membership requires a
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