16
Chapter
Nonbank Thrift Institutions:
Savings & Loan Associations, Savings
Banks, Credit Unions, and Money
Market Funds
Money and Capital Markets
Financial Institutions and Instruments in a Global Marketplace
Eighth Edition
Peter S. Rose
McGraw Hill / Irwin
Slides by Yee-Tien (Ted) Fu
16 - 2
 Learning Objectives 
 To see the significant roles that thrift
institutions play in the functioning of a modern
economy and financial system.
 To learn about the types of services that thrift
institutions offer to the public and who their
principal competitors are.
 To understand the principal similarities and
differences among the major types of thrift
institutions.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Introduction
 Nonbank financial institutions play a vital role
in the flow of money and credit within the
financial system, especially the home
mortgage market and the market for personal
savings.
 Recently however, both bank and nonbank
financial institutions are “converging” in terms
of the services they offer and the markets they
serve.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Savings and Loan Associations
 Savings and loan associations (S&Ls) are
among the largest of all thrift institutions,
accepting deposits and extending loans and
other services primarily to household
customers.
 S&Ls emphasize longer-term loans, especially
mortgage loans.
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Savings and Loan Associations
 S&Ls began essentially as a single-product
industry in the early 19th century, accepting
savings deposits from middle-income
individuals and families and lending those
funds to home buyers.
 Later, competition from other financial
institutions, deregulation, and many failures,
forced S&Ls to diversify their operations and
aggressively solicit new customers.
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Savings Institutions
Source: Board of Governors of the Federal Reserve System
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Savings Institutions
$ Billions
1,800
1,600
1,400
Total Financial Assets
1,200
1,000
800
600
400
Total Deposits
200
0
1961 1966 1971 1976 1981 1986 1991 1996 2001
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Data
McGraw
Source:
HillBoard
/ Irwinof Governors of the Federal Reserve System
16 - 8
Savings and Loan Associations
 The size of the savings industry peaked in
1988, when total financial assets reached
$1,640 billion.
 The sharp decline that followed was the result
of large numbers of failures and the conversion
of some S&Ls into other kinds of financial
institutions, most notably commercial banks
and savings banks.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Savings and Loan Associations
 One primary cause for the low profitability of
S&Ls during the 1980s and 1990s was that
many S&L assets (fixed-rate mortgage loans)
were interest-rate insensitive while most of
their liabilities (deposits) were highly sensitive
to interest rates.
 So, during periods of rapidly rising market
interest rates, the industry’s net interest margin
were severely squeezed.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Savings and Loan Associations
 S&Ls need
sound diversification decisions,
 carefully managed loan portfolios,
 risk management, and
 further relaxation of government regulations.

 Today, more aggressive S&Ls are branching
out in at least three different directions – real
estate models, family financial centers, and
diversified models.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Savings Banks
 Savings banks began in Scotland in the early
19th century, and then took root in the U.S.
about 150 years ago to meet the needs of the
small saver.
 Like S&Ls, they play an active role in the
residential mortgage market. However, they
are more diversified in their investments,
purchasing corporate bonds and common
stock, making consumer loans, and investing
in commercial mortgages.
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Savings Banks
 The number of savings banks operating today
is small – at most a few hundred.
 They are scattered throughout the U.S., though
they are most prominent in the New England
and the Middle Atlantic states.
 The distinction among S&Ls, savings banks,
and commercial banks is becoming blurred,
especially because they are readily convertible
from one form to another.
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Savings Institutions
Source: Board of Governors of the Federal Reserve System
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Savings Banks
 The savings bank industry faces a number of
problems that will significantly affect its
future as a conduit for savings and investment.
 In particular, savings banks have inflexible
asset structures and face competition from
other financial institutions.
 Their future growth depends on their ability to
gain the necessary changes in government
regulations to allow them to respond to
changing financial market conditions.
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Credit Unions
 Credit unions are cooperative, self-help
associations of individuals, and savings
deposits and loans are offered only to members
of each association.
 Credit unions came to the U.S. in 1909, and
their long-run survival stems mainly from their
being able to offer low loan rates and high
deposit interest rates and from their relatively
low operating costs.
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Credit Unions
 Credit unions are organized around a common
affiliation or bond among their members. Most
members work for the same employer, or for
one of a group of related employers.
 There is a strong shift today toward fewer, but
larger, credit unions. The decline is due
primarily to mergers, failures, and a structural
shift in the U.S. economy from manufacturing
industries toward more service industries.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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U.S. Credit Union Statistics
Year
Number of
Credit Unions
Number of
Members
Assets
($ Millions)
1940
1950
1960
1970
1980
1990
2000
9,224
10,586
20,094
23,687
21,465
14,049
10,684
2,693,863
4,617,086
12,025,393
22,775,511
43,930,569
60,087,256
79,751,873
249
1,005
5,651
17,872
68,974
216,874
449,799
Data
McGraw
Source:
HillCredit
/ IrwinUnion National Association
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
16 - 18
Credit Unions
 U.S. credit unions are under intense pressure to
develop new services and penetrate new
markets due to increasing competition from
other financial institutions and a decline in the
demand for their historically most important
credit service – automobile loans.
 However, the industry has repeatedly shown its
capacity for service innovation and its ability
to compete successfully for both consumer
loans and savings accounts.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Credit Unions
Source: Board of Governors of the Federal Reserve System
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Money Market Funds
 In 1972, the first money market mutual fund –
a financial intermediary pooling the savings of
individuals and businesses and investing those
monies in short-term, high-quality money
market instruments – opened for business.
 The fund offered share accounts whose yields
reflect prevailing money market rates. In
contrast, the interest rates on most bank
deposits were then restrained by government
regulation.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Money Market Funds
Source: Board of Governors of the Federal Reserve System
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Money Market Funds
 On the whole, money market funds hold highquality assets. The short maturity of the assets
results in a highly liquid security portfolio that
can be adjusted quickly to suit changing
market conditions.
 They are mostly “no load” funds – there is no
commission charge for opening an account,
purchasing more shares, or redeeming shares.
The accounts can be accessed easily too.
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Data
McGraw
Source:
HillBoard
/ Irwinof Governors of the Federal Reserve System
16 - 23
Money Market Funds
 Today, money market funds serve as

cash-management vehicles where market rates can
be earned on funds used for daily transactions;
 tax-sheltering vehicles (when tax-exempt funds
are chosen);
 a temporary repository for liquid funds; and
 a safety haven for savings.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Money Market Funds
 However, note that money market fund share
accounts are not government insured.
 The differential between the yield on the
accounts and the rate of return on money
market deposits at banks has also narrowed in
recent years.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
16 - 25
Money and Capital Markets in Cyberspace
 More information on savings and loan
associations and savings banks can be found at
http://www.ots.treas.gov/ and http://www.fdic.gov/.
 Websites for the credit union industry include
http://www.ncua.gov/, http://www.cuna.org/,
http://www.woccu.org/, http://www.culand.com/, and
http://www.cujournal.com/.
 Money market funds are discussed on sites like
http://www.smartmoney.com/ and money.cnn.com.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
16 - 26
Chapter Review
 Introduction
 Savings and Loan Associations
Origins
 How Funds Are Raised and Allocated
 Trends in Revenues and Costs
 Possible Remedies for the Industry’s Problems

McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
16 - 27
Chapter Review
 Savings Banks
Number and Distribution
 How Funds Are Raised and Allocated
 Current Trends and Future Problems

 Credit Unions
Credit Union Membership
 Size of Credit Unions
 New Services Offered
 A Strong Competitive Force

McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter Review
 Money Market Funds
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.