1 / 16

THRIFT OPERATIONS

THRIFT OPERATIONS. CHAPTER 21. BACKGROUND ON SAVINGS INSTITUTIONS. S&L are dominant form of this type of depository institution; Savings Bank is other California had the Largest S&L (Downey → US Bank) New York has the largest SB (Dime, 1864)

boaz
Download Presentation

THRIFT OPERATIONS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. THRIFT OPERATIONS CHAPTER 21 Dr David P Echevarria

  2. BACKGROUND ON SAVINGS INSTITUTIONS • S&L are dominant form of this type of depository institution; Savings Bank is other • California had the Largest S&L (Downey → US Bank) • New York has the largest SB (Dime, 1864) • Chartered by OTS (Federal banks) or State commissions • OTS is oversight body for federally chartered banks • Mutual (depositor owned) or Stock (investor owned) • Deposit insurance provided by FDIC Dr David P Echevarria

  3. SOURCES OF FUNDSRHS of Balance Sheet (Liabilities) • Deposits; SB = 72%, S&L=76% • Pass-book savings (traditional) • Money Market Deposit Accounts (Garn-St. Germaine Act, 1982) • Certificates of Deposit (higher rates than pass-book, penalty for early withdrawal) • NOW accounts ( DIDMCA, 1980) Dr David P Echevarria

  4. SOURCES OF FUNDSRHS of Balance Sheet (Liabilities) • Capital Markets; SB = 23%, S&L=23% • Mutual; borrowing via repo agreements or from the FHLBB • Stock; selling of equity • Capital; SB=5%, S&L=2% • Retained earnings and common stock (for non-mutual) • Earnings a function of the spread (Loan rate - rate paid to depositors) • Size of capital base important factor in ability to weather financial storms Dr David P Echevarria

  5. USES OF FUNDSLHS of Balance Sheet (Assets) • Cash and Investments • Service depositor withdrawal demands • Portion of required reserves held as cash • Mortgages • Single most important asset and source of risk • Preference for fully collateralized loans Dr David P Echevarria

  6. USES OF FUNDSLHS of Balance Sheet (Assets) • Mortgage-Backed Securities • Package and sell to individual and institutional investors • Retain servicing of loan on fee-basis • Consumer and Commercial Loans • Automobiles for consumers (collateralized) • Commercial Real Estate (ditto) • Other Uses of Funds (Repos) Dr David P Echevarria

  7. RISK MANAGEMENT • Liquidity Risk: savings institutions typically have • Short-term liabilities • Long-term assets • Default Risk; dealing with non-performing loans • Narrow capital base and thin margins makes banks sensitive to non-performing loans • Managing Default Risk is a function of managing the credit policy • Interest Rate Risk; managing impact of interest rate volatility • Fluctuations in the values of the asset portfolio and its liabilities • Assets tend to have fixed rates; liabilities tend to be subject to variable rates Dr David P Echevarria

  8. RISK MANAGEMENT • Net Interest Margin = (Interest Revenues - Interest Expenses) / Assets Note that IR - IE reflects the spread; the spread is not stable, hence the risk Computing the GAP = Rate-sensitive assets (uses) - Rate-sensitive liabilities (sources) • GAP Ratio = $ value of rate-sensitive assets / $ value of rate-sensitive liabilities • When ratio ≥ 1.00 bank is okay • When ratio is < 1.00, bank has a interest rate risk exposure in need of hedging Degree of interest-rate sensitivity is measured using Duration Dr David P Echevarria

  9. RISK MANAGEMENT • Managing Interest Rate Risk • Adjustable-Rate Mortgages (ARMS); variable rate assets • Financial Futures Contracts; • Short positions hedge fixed-rate loans • As interest rates rise, profits on hedge offsets losses on fixed rate loans • Interest Rate Swaps; exchanging fixed for floating rate instruments • Mortgages tend to be fixed rate, rates paid to depositors tend to vary w/market • Obtaining the interest flow of floating rate instruments help to manage sensitivity • Interest Rate Caps; maximum rate to be paid as market rates change over time Dr David P Echevarria

  10. CREDIT UNIONS • Affinity Bond; i.e., Navy Federal Credit Union (multi-national in scope) • More than 10,000 CU in US; Many have less than $100 Million in assets • Objectives Of Credit Unions; provide loans to those who might otherwise be unable • Obtain funds at a reasonable cost from depositors • Members own the CU and vote for officers of the unions and for all rule making • May be Federal or state chartered • Principal Regulatory body is the NCUA; 6 regional offices report to 3 member board • Grant and revoke charters • Examines financial condition • State chartered institutions insured by NCUA subject to oversight Dr David P Echevarria

  11. SOURCES AND USES OF CREDIT UNION FUNDS • Savings deposits and Share Draft accounts form the principal sources • Loans to members are the main use of funds. Also have Lines of Credit, Mortgages, • CD's and money market accounts • Profits are paid out to members as interest on their average balances • Temporary funds may be obtained from the Central Liquidity Facility (CLF) Dr David P Echevarria

  12. CREDIT UNION RISK EXPOSURE • Liquidity Risk; high levels of withdrawals may create cash flow problems • Default Risk; most loans are consumer type and generally collateralized • Interest Rate Risk; assets and liabilities are both rate sensitive and correlated. Therefore, this is not a source of concern to CU Dr David P Echevarria

  13. HOMEWORK QUESTIONS • Describe the asset, liability, and equity structure of depository institutions • What federal legislation helped savings institutions become more competitive? • What particular problems do banks face from; liquidity risk? Default risk? Interest-rate risk? (Details are what count here.) • Why is the capital (or equity) position of a depository institution important? • What are the essential reasons for an interest rate swap? Dr David P Echevarria

  14. HOMEWORK QUESTIONS • How does the swap work? • In what ways do credit unions differ from S&L? • What agency is responsible for credit union oversight? • Who insures credit union deposits? • Do credit unions have any advantages over S&Ls? any disadvantages? Dr David P Echevarria

  15. SAVINGS AND LOAN CRISIS • Reasons for Failure; • Non-performing loans leading to forced liquidations and resulting losses • Losses on poor investments; junk bonds, commercial real estate • Bank management fraud and embezzlement; long list of "players." • Provisions of FIRREA (1989); Financial Inst. Reform, Recovery & Enforcement Act • Increased authority over state chartered institutions • Abolished FSLIC and FHLBB. FDIC reorganized into BIF, SAIF divisions • Created the RTC and Office of Thrift Supervision • Permitted Bank Holding Companies (BHC) to acquire healthy thrifts • Stiffened penalties for fraud and embezzlement • Created the Federal Housing Finance Board to oversee 12 FHL Banks • Required regulators to develop and enforce minimum standards for property appraisal • Lowered tax benefits to acquirers of failed or failing thrifts Dr David P Echevarria

  16. SAVINGS AND LOAN CRISIS • Provisions of FDICIA (1991); Federal Deposit Insurance Corp. Improvement Act • Deposit insurance premiums based on riskiness of institution • Detailed rules for the conduct of federal regulators • Increased borrowing authority for FDIC and reserve requirements • Established a "tripwire" system for early problem detection • Expanded FDIC authority over foreign bank expansion and termination's in US required foreign banks to obtain insurance • Restricted activities of state chartered thrifts to those permitted to federally chartered thrifts Dr David P Echevarria

More Related