Other Depository Institutions I. Savings and Loan Associations

1. Other Depository Institutions • I. Savings and Loan Associations • A. Evolution of Savings and Loan Associations • Historically, banks and insurance companies did not lend to individuals for housing. • People banded together to pool their money to lend to members. Funds repaid were redeployed to other members. • The owners of these original S&Ls were the depositors. These mutuals were dubbed “building and loan societies” then, “building and loan associations.” • Profits were distributed with remaining income retained as reserves and capital surplus for future use. • Depositors had voting rights that were proportionate to deposits.

2. As demand increased, the associations expanded by adding members, leading to the more general name, “savings and loan association.” • Later some S&Ls organized as stock associations to acquire equity capital but many remained as mutuals. • The industry has been marked by numerous expansions and contractions. The most volatile occurred around the Great Depression and the 1980s (known as the thrift crisis). • Historically, Regulation Q restricted the interest which they could pay. • Skyrocketing interest rates during the 1970s caused depositors to withdraw their funds. This became known as disintermediation. • The loss of deposits was exacerbated by book value accounting. • In 1980, legislation lifted the cap on interest rates and allowed a broader range of assets.

3. Expansion was often ill-conceived and when coupled with historical problems, often resulted in bankruptcy. • Over the next two decades, the industry lost nearly 50% of its members to failure, merger, or forced acquisition. • While the number of S&Ls declined, assets grew for a time, but then declined. • B. Regulation • The Federal Home Loan Bank System (FHLBS) was established in 1932 to oversee S&Ls, similar to the Federal Reserve. • In 1934, the National Housing Act set up the Federal Savings and Loan Insurance Corporation (FSLIC) to insure deposits. • After the industry’s collapse, regulatory control was restructured in 1989 in the Federal Institutions Reform, Recovery & Enforcement Act (FIRREA). • FSLIC was replaced by the Savings Association Insurance Fund (SAIF). • The Office of Thrift Supervision (OTS) took over regulatory oversight. • The Resolution Trust Corporation (RTC) was established to liquidate bankrupt institutions.

4. C. The Savings & Loan Industry Today • Regulatory change has stabilized the industry and new entrants have appeared. • S&Ls can have either a state or federal charter. • Deposits are insured up to $100,000 by the SAIF which is overseen by the FDIC. • D. Sources and Uses of Funds • Historically, most S&L funds were raised through savings accounts and CDs. • Beginning in the 1980s, the S&L industry began offering many new savings vehicles: • NOWs • Money Market Deposit Accounts (MMDA) • IRAs and Keogh Accounts • Additional funds were obtained from the Federal Home Loan Bank System, stock conversion, asset sales and asset securitization.

5. II. Savings Banks • A. Evolution of Savings Banks • Originally quasi-charitable institutions established to foster savings among the working class. • Originally state chartered mutual organizations. • Initial rapid growth slowed after World War II. The industry responded by transforming into consumer banks. • Transformation was aided by previous legislation. • B. The Savings Bank Industry Today • Savings banks have increased in number and size due to the conversion of many S&Ls. • Savings banks may be federally chartered by OTS or state chartered. • Despite expansion in California, most of the approximately 700 savings banks are located in the northeast.

6. C. Sources and Uses of Funds • Volatile history has led regulators to demand higher capital ratios. • The principal source of funds is fixed rate time deposits. Other sources are NOWs, MMDAs, and demand deposits. • Savings banks primarily use their funds for mortgages but less than S&Ls, due to broader lending authority. • III. The Thrift Crisis and Beyond • S&Ls and savings banks are often referred to collectively as thrifts. • The setting for the thrift crisis began in the 1970s with soaring interest rates. • This caused the value of the thrifts’ asset portfolios to rapidly decline. Balance sheets no longer reflected the true financial position.

7. Because of Regulation Q, depositors left for higher yields. When ceilings were lifted, thrifts had trouble keeping pace because of their portfolios. • With nothing to lose, many thrifts sought higher returns by ever riskier ventures. This is called betting the bank. • This strategy was aided by the increase to $100,000 of deposit insurance. • As risky bets failed, so did many institutions. Congress was compelled to act. Insolvent institutions were either closed or merged. • Insert 23.1 & 23.2 • Today, strict regulation of asset quality and capital have returned the industry to profitability. • A more stable environment has evolved, but at the expense of taxpayers. The final cost of could be $500 billion. • Insert 23.3, 23.4, & 23.5

8. IV. Credit Unions • A. Evolution of Credit Unions • Credit unions were established to serve those of low income. They provided inexpensive credit and a savings outlet. • During the 1950s, they began to offer new services and sought a wider customer base. Growth has since soared. • B. Credit Unions Today • Membership is restricted to a common bond. The participant must be a member/or family member of the sponsoring organization. Cost advantages that credit unions often enjoy: free office space, officers and directors are usually volunteers, and exemption from taxation. • These institutions are mutuals and pay their shareholders in the form of dividends. • Officers and board members are elected by the shareholders.

9. The National Credit Union Administration is responsible for federal charters and regulation. • Deposits are insured up to $100,000 by the National Credit Union Shares Insurance Fund (NCUSIF). • C. Sources and Uses of Funds • The primary vehicle for raising funds is time deposits, called “shares.” Also offered are money market certificates and interest-bearing “share drafts.” • Funds are used primarily for consumer loans. Other uses include: government securities, mortgages, and credit cards. • Some credit unions offer other nonbanking services. • Insert 23.6

10. V. Distinctions and Differences • Most differences in depository institutions are historical in nature. The passage of time has blurred these differences. • Services offered are often functionally the same and are distinguished in name only. • Competition will likely force the evolution of these institutions into full service institutions. • VI. Summary • There are three types of nonbank depository institutions • Savings and Loan Associations • Savings Banks • Credit Unions • Each has its own history, regulatory structure, and constituency. • But all are evolving toward a common form.