Thrift Institution

Thrift institutions

„і Savings associations

„іSavings banks

„іCredit unions

First created in the early 1800s in response to the commercial banksЎ¦ failure to adequately serve the needs of individuals requiring borrowed funds to purchase homes.

Similar to commercial banks, they provide important residential mortgages and other lending services to households.

Insert fig 12.1

The saving associations made long term residential mortgages usually backed by the short-term deposits of small savers. For most of the post-World War II period the upward sloping yield curve meant that the rate of long-term mortgages exceeded the rates they paid on the short-term deposit liabilities.

During the October 1979 and October 1982 period, the Federal Reserve radically changed its monetary policy strategy by targeting bank reserves rather than interest rates. This led to a sudden and dramatic surge in interest rates, with rates on T-bills and bank certificates of deposits rising as high as 16 percent.

„і Short-term rates and cost of funds increased

First, many saving associations faced negative interest spreads, as the short-term interest expense was too high

Second, they had to pay more competitive interest to retain existing customers to prevent disintermediation, which means withdrawal of deposits from depository institutions to be reinvested elsewhere such as the money market mutual funds

Actions taken by the saving associations:

1) On the liability side, savings association issued more market rate-sensitive liabilities such as money market deposit accounts to limit disintermediation and compete with mutual funds.

2) On the asset side, they were allowed to offer floating or adjustable-rate mortgages and, to a limited extent, expand into consumer real estate development and commercial lending.

In mid-1980s, real estate and land prices in Texas and Southwest collapsed. It was then followed by economic downturns in other parts of the US. Many borrowers with mortgage loans issued by savings associations defaulted. This caused a great number of saving association failures.

Savings Banks

They were established as mutual organizations (mutual organization is an institution in which the liability holders are also the owners) in states that permit such organizations, which were similar to the savings associations.

They were also badly influenced by the crash in New England real estate values in 1990-1991. Like savings associations, savings banks also decreased a lot in both size and number.

In general, savings banks rely more on deposits than savings associations and therefore savings bank have fewer borrowed funds. Savings banks have been allowed greater freedom to diversify into corporate bonds and stocks. These are the main differences of savings banks from savings associations.

The regulators of savings institutions

1) The Office of Thrift Supervision

2) The Federal Deposit Insurance Corporation

3) Other regulators

1) The Office of Thrift Supervision

Established in 1989, this office charters and examines all federal savings institutions. It also supervises the holding companies of savings institutions.

2) The Federal Deposit Insurance Corporation (FDIC)

It