CHAPTER 16
THRIFT INSTITUTIONS
AND FINANCE
COMPANIES
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Institutions Covered
Thrift Institutions
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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.
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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 S&Ls to convert to stock form.
Stock S&Ls outnumber mutual S&Ls today.
Assets of stock S&Ls are many times as large as
the assets of mutual S&Ls.
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Exhibit 16.3A: Number of Savings Institutions
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Exhibit 16.3B: Assets of Savings Institutions
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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 and
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 Savings Institutions
Savings bank regulators—
Federal regulator: Office of Thrift Supervision->OCC
Insurer: FDIC
Savings association (S&L) regulators—
Federal regulator: OTS->OCC
Insurer: FDIC
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.
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Assets of Thrifts
Residential mortgages still main asset because of
tax break.
Other loan types more well-represented now than
in past because of deregulation.
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
non-deposit sources 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
Thrift capital has risen sharply since 1989
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Income, Expenses, & Performance
Structure of income statement comparable to banks
Net Interest Margin about 3%
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 1.2%; ROAE
around 13%.
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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 common bond (e.g., same
employer, church, trade association).
Credit Union assets have grown steadily in recent
years.
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Crucial differences from other depository institutions
Always and strictly mutually owned; organized like clubs.
Common-bond membership/exemption from antitrust
constraints. Most common bonds are occupational.
Others are associational/fraternal or residential.
Not-for-profit and therefore tax-exempt.
Expected to concentrate on smaller consumer loans.
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Credit Union Regulation
Regulated by the National Credit Union
Administration (NCUA).
Deposits are insured by the National Credit
Union Share Insurance Fund (NCUSIF).
Liquidity is provided by the Credit
Liquidity Facility (CLF).
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Credit Union Assets
Credit union member loans constitute bulk
of CU assets.
Other assets include cash and investments.
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Credit Union Liabilities
Regular share accounts are like savings accounts.
Share certificates are time deposits like CDs, and
have become a more important source of funds.
Share drafts are CU interest-bearing checking
accounts.
Net worth includes reserves and undivided earnings.
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Credit Union Developments
Small credit unions are merging or
liquidating.
Credit unions are adopting new technologies,
especially larger credit unions.
Funds flows are becoming increasingly
coordinated.
Corporate central credit unions correspondent banking for credit unions.
Powerful trade associations/lobbying groups:
CUNA and NAFCU.
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Trends in Credit Unions
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Selected Ratios for Credit Unions, Dec. 31, 2009
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Credit Union Assets, Dec. 31, 2009
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Credit Union Liabilities, Dec. 31, 2009
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Finance Companies
Lenders to businesses and consumers who are
higher risk borrowers.
Highly leveraged; borrowing funds from banks and
the open market.
Most larger finance companies are now subsidiaries
of bank and financial holding companies.
Many "non-bank" banks or consumer banks are
similar to finance companies.
Finance companies are diverse and adaptive to
changing needs.
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Types of Finance Companies
Captive sales finance companies help finance
goods sold by their parent companies.
The largest finance companies are sales finance
companies that are captives of major retailers and
auto manufacturers that help finance sales of their
parents’ goods.
Other large finance companies are large factoring
finance companies.
Consumer finance companies are independent
lenders that largely make personal loans to
consumers.
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Finance Company Assets
Investment securities, real assets, cash, and
deposits represent a small percent of assets.
Consumer receivables (loans):
Personal loans;
Automobile credit;
Mobile home credit;
Revolving Consumer Installment Credit;
Other Consumer Installment Credit.
Real Estate Lending (second mortgages) is the
fastest growing area of finance company lending.
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Finance Company Assets, cont.
Business credit -- area of growth in recent years:
Wholesale paper -- loans to finance inventories. "Floor
plan" is a type of wholesale paper.
Retail paper -- purchase of consumer sales (loan)
contracts from retailers.
Lease paper -- leasing business equipment and
consumer durables.
Commercial accounts receivable financing.
Factoring -- the purchase of accounts receivables.
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Liabilities and Net Worth
Net worth: highly leveraged
Net worth level directly related to riskiness of
loan portfolio
Debt:
Bank debt
Commercial paper
Transfer credit from parent companies
Long-term debt when rates are low
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Regulation of Finance Companies
Consumer protection more than safety and
soundness
Interest rate ceilings on loans, but phased out
in most states
Debt collection practices
Branching, chartering, and merger
restrictions
Truth-in-lending (Regulation Z)
Bankruptcy protections
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Finance Company Developments
Securitization
Shift toward business credit
Shift toward second mortgage lending
Growth of leasing
Growth of home equity credit lines
Decline in small finance companies
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