February 1975
Nonbank Thrift Institutions in 1974
Changing pressures in financial markets and in
general economic conditions caused major shifts
in flows of funds into savings and loan associations, mutual savings banks, and credit unions
during 1974. As a result of these pressures,
there were substantial changes not only in the
composition of the assets held by these financial
intermediaries but also in the structure of their
deposits.
During the second and third quarters of 1974
deposit growth at thrift institutions was sharply
curtailed, but in recent months the growth rate
has improved markedly. For savings and loan
associations and mutual savings banks, the renewed flow of savings has permitted some rebuilding of depleted liquid asset portfolios,
repayment of debt, and an expansion of commitments to make mortgage loans to the housing
sector, which had been adversely affected by
limited credit availability and a number of other
nonfinancial factors. For credit unions—with
only one-tenth the assets of savings and loan
associations, yet the fastest growing of the thrift
institutions—the improved flow of deposits has
made possible a continuation of their growing
importance in providing consumer credit.
MAJOR
DEVELOPMENTS
Early in 1974, when the peak l x h per cent
ceiling rate available on 4-year accounts at
major thrift institutions was especially attractive
relative to yields on competing market securities, thrift institutions experienced rather favorable net deposit inflows. After the end of the
Arab oil embargo, demands by businesses for
credit mounted and monetary policy tightened
in the face of intensifying inflationary pressures.
As yields on market instruments moved well
above the maximum IV2 per cent ceiling on
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depositary claims at savings and loan associations and mutual savings banks, inflows to these
intermediaries slowed dramatically and for a
time during the summer became negative. The
combined deposit growth rate for savings and
loan associations and mutual savings banks
dropped from 8.2 per cent in the first quarter,
seasonally adjusted, to 4.2 per cent in the second quarter and 2.5 per cent in the third.
Thereafter, monetary policy became more accommodative, recessionary forces in the economy began to take hold, and business credit
demands diminished; as a result, market rates
fell and deposit growth at these intermediaries
rebounded—rising to a seasonally adjusted rate
Selected DEPOSIT GROWTH RATES and
INTEREST RATES, 1974
Per cent
Per cent per annum
INTEREST RATES
V
\
Treasury bills
3-month
4-year certificates
maximum
Passbook-type*
maximum
1
1
Mar.
1
t
l
1
June
1
1
1
Sept.
1
i
*
Dec.
*At mutual savings banks and Federally insured savings and
loan associations.
Seasonally adjusted annual rates.
February 1975
56
Federal Reserve Bulletin Q. February 1975
of 8.1 per cent in the fourth quarter—and this
trend continued during early 1975. Deposit
growth at credit unions followed a similar pattern, although the decline in growth during the
third quarter was less severe than for the other
institutions.
Pressures on thrift institutions during last
summer's period of weak deposit flows were
aggravated by offerings of a variety of new,
highly competitive marketable debt instruments
that were designed to attract funds from individuals. Bank holding companies offered more
than $1 billion of relatively small-denomination,
variable-rate notes that pay nearly 10 per cent,
or even more, in their first year. Mutual funds
investing in money market instruments were
also expanding rapidly over the summer. And
individuals with limited amounts of funds to
invest showed substantial interest in the new
notes offered by the Treasury in its August
refinancing; these notes carried 9 per cent
coupons and were available in denominations
of $1,000. However, even before the Congress
empowered the Federal Reserve to regulate
variable-rate notes issued by bank holding companies and their affiliates, signs of a general
downturn in interest rates had already begun to
reduce the investment appeal of such flexiblerate instruments.
With diminished inflows of funds to savings
and loan associations and mutual savings banks,
which are major sources of housing credit, the
supply of funds for residential mortgage loans
became extremely limited. Housing activity was
depressed by this reduced supply of funds and
also by rising land and construction costs, declining consumer real incomes, prior overbuilding in some areas, and the effects of increased
costs of energy. In May housing starts fell below
1.5 million units at an annual rate, down considerably from the more than 2 million units
started in 1973. Because of this deterioration
in housing, a number of actions were taken by
Federal housing agencies and the Congress to
provide special public assistance to this segment
of the economy. Early in the year the Government National Mortgage Association revised its
commitment program to permit the purchase of
$6.6 billion of Federally guaranteed mortgages
bearing rates of interest below those prevailing
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in the market. This program was further expanded in May, bringing to nearly $10 billion
the amount of Government-insured belowmarket-rate mortgages that GNMA was willing
to buy. Later in the year—in October—a similar
program was initiated to cover conventional
mortgages under terms of the Emergency Home
Purchase Assistance Act of 1974.
Two other programs to support housing were
also begun in May. The Federal Home Loan
Mortgage Corporation committed $3 billion to
purchase conventional mortgages at subsidized
rates, and the Federal home loan banks began
a $4 billion program to lend funds to member
savings and loan associations at rates that were
as much as 50 basis points below borrowing
costs of the Federal home loan banks. Savings
and loan associations made active use of this
source of funds from June through the remainder
of the year. Even so, the housing industry
suffered its worst contraction since World War
II. Housing starts fell below an annual rate of
1 million units in both November and December.
Throughout this critical period, the Federal
Reserve, in its role as lender of last resort, stood
ready to provide liquidity to the Federal home
loan banks and to mutual savings banks should
these institutions exhaust their access to other
sources of funds. Arrangements to extend
emergency credit were formalized, and financial
developments at savings and loan associations
and mutual savings banks were closely monitored.
Finally, several regulatory changes during the
latter half of the year made it possible for the
major thrift institutions to compete more effectively for funds against market securities. The
Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the
Federal Home Loan Bank Board adopted regulations that permitted commercial banks, mutual
savings banks, and savings and loan associations to begin offering in late December a new
6-year certificate with a rate ceiling lA of a
percentage point more than that on the 4-year
certificate.
The competitive position of depositary institutions was further strengthened when the
Congress passed legislation raising the amount
February 1975
Nonbank Thrift Institutions in 1974
of insurance coverage on public and private
deposits at Federally insured commercial banks,
mutual savings banks, and savings and loan
associations. Effective November 27 the amount
of insurance was raised from $20,000 to $40,000 on private deposits and to $100,000 on
deposits of governmental units. In response to
this change, the regulatory authorities established a new rate ceiling—presently equal to 13A
per cent—on all time deposit accounts, regardless of maturity, of public bodies. For passbook
savings of such governmental units, the interest
rate ceilings continue to be the same as for
individuals.
SAVINGS AND
LOAN ASSOCIATIONS
Disintermediation and the subsequent improvement in deposit flows had major effects on the
sources and uses of funds for savings and loan
associations. During the first quarter of 1974—
when deposit flows were improving from the
depressed levels of the previous summer—
TABLE 1
Federally insured savings and loan associations:
Sources and uses of funds
In billions of dollars, not seasonally adjusted
1974
Funds
Sources:
Deposits 1
Borrowed funds
Subtotal
Gross mortgage
repayments 2
3
Other sources, net
Total
Uses:
Cash and liquid assets . . .
Other investment securities
Gross mortgage acquisitions
Total
1
Qi
Q2
Q3
Q4
7.9
-.4
7.5
2.9
3.6
6.5
— .2
3.8
3.6
5.0
.7
5.7
5.9
-.3
13.0
7.8
-.4
13.9
6.9
-1.2
9.3
6.1
-2.0
9.8
2.7
.2
-2.0
10
-1.8
.1
2.3
-.3
10.2
13.1
14.9
13.9
11.0
9.3
7.8
9.8
Net change in deposits, including interest credited.
Includes, in addition to repayments, proceeds from sales
of loans and participations and miscellaneous credits. Excludes
interest, taxes and minor miscellaneous items.
3
Includes net changes in loans process, reserves and surplus,
and other liabilities minus the net changes in miscellaneous
loans and assets not set out separately in the "uses" statement.
2
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57
savings and loan associations repaid borrowings
and rebuilt liquid asset portfolios. Gross acquisitions of mortgages increased as outstanding
commitments were taken down, and substantial
amounts of new mortgage commitments were
made for takedown later in the year.
As deposit inflows began to decline in the
second quarter, savings and loan associations
increased their borrowing sharply and reduced
their cash and liquid assets in an effort to meet
commitments for mortgage loans. New commitments of funds were also curtailed; as a
result, outstanding commitments reached a peak
for the year in April and then declined over the
remainder of the quarter.
Pressures on liquidity intensified in the third
quarter when net deposit outflows were sustained. Thus the associations were forced to rely
even more on borrowed funds and to reduce
their liquid assets still further to meet previous
mortgage loan commitments. Outstanding commitments fell dramatically as these takedowns
continued at a substantial pace and the associations made few new agreements to lend funds
in the future.
As is customary, the increases in borrowings
by savings and loan associations during the
second and third quarters came primarily from
the Federal home loan banks. Thus, of the total
of nearly $7.4 billion borrowed in that interval,
$5.7 billion came from those banks and the
remainder from commercial banks. More than
half of the funds provided by the home loan
banks were loaned under the special program,
noted earlier, at rates below the prevailing market level. Even so, average rates on new advances made by the home loan banks during
the period were still in excess of 9 per cent.
Two factors made it possible for savings and
loan associations to reduce their borrowings in
the fourth quarter. First, deposit inflows picked
up again. Second, mortgage acquisitions
dropped sharply, along with the decline in
housing, to the lowest rate for any quarter of
the year. These developments made it possible
for the associations' to begin to rebuild their
liquidity and reduce outstanding borrowings, a
process that continued into early 1975.
For 1974 as a whole, virtually all of the
deposit growth at savings and loan associations
February 1975
58
Federal Reserve Bulletin Q. February 1975
Deposit mix, SAVINGS AND LOANS: 1974
Net change, billions of dollars
Not seasonally adjusted.
occurred in certificate accounts. The 4-year certificates were particularly important. A survey
of large associations shows that 4-year certificates at these institutions increased during each
month of 1974. Even during the weakest months
of the year—July and August—there were substantial gains in 4-year certificates, in spite of
the fact that total savings at these institutions
declined. The recently inaugurated 6-year certificate, which carries a higher rate ceiling, may
provide depositary institutions with an additional instrument that may be especially attractive to savers.
MUTUAL SAVINGS BANKS
The experience of mutual savings banks in 1974
largely paralleled that of savings and loan associations. However, there were several differences, the most striking of which was the
actual shrinkage of total assets at these banks
during the third quarter.
The shrinkage in assets during the July-September period can be explained by two factors.
First, most mutual savings banks are located in
the northeastern part of the United States and
their depositors are more aware than many
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others of the market instruments that are worthwhile alternatives to depositary claims. The
savings banks are therefore particularly vulnerable to reduced deposit flows when market rates
of interest rise above ceiling rates on thrift
claims. Second, the mutual savings banks cannot obtain borrowed funds so easily as can
savings and loan associations that are members
of the Federal Home Loan Bank System. Only
about 10 per cent of all mutual savings banks
are members of this System; the others rely on
commercial bank lines of credit.
In the first quarter of 1974 deposits of mutual
savings banks grew at a relatively moderate
pace. Apart from meeting takedowns of outstanding mortgage loan commitments, these
banks used funds primarily to increase their
holdings of liquid assets and to purchase other
investment securities, mostly corporate bonds.
In contrast to the savings and loan associations,
the mutual savings banks did not increase their
mortgage commitments over this period, and
TABLE 2
Mutual savings banks: Sources and uses of
funds
In billions of dollars, not seasonally adjusted
1974
Funds
Qi
Q2 1
Q3
Q4'
1.2
Sources:
Deposits 2
Borrowings
Other sources, net 3
Total
2.1
-.1
.2
2.2
.4
.2
-.1
.5
-.8
.4
.1
-.3
-.2
1.0
Uses:
Net change in mortgage
holdings
Cash and liquid assets 4 ..
Other securities 5
Total
.8
.5
.9
2.2
.9
-.7
.3
.5
.5
-.7
-.1
-.3
.1
.6
.3
1.0
1
Data are adjusted for conversions of 3 mutual savings banks
to commercial banks during April and May.
2
Net change in deposits, including interest credited.
3
Includes net changes in other liabilities and general reserve
accounts minus the net change in other assets not set out
separately in the "uses" statement.
4
Includes net changes in cash, U.S. Govt, securities, Federal
agency securities, and "other loans." "Other loans" include
open market paper, Federal funds, and other nonmortgage
loans.
5
Includes net changes in State and municipal securities,
corporate and other bonds, corporate stock, and GNMA mortgage-backed securities.
e
Estimated.
February 1975
Nonbank Thrift Institutions in 1974
thus avoided locking themselves into future
mortgage acquisitions.
As a result, when deposit flows dropped off
sharply in the second quarter, mutual savings
banks were in a much better position than in
previous periods of disintermediation. They
were able to meet takedowns of outstanding
mortgage commitments by reducing their liquid
assets and by increasing their borrowings only
a small amount.
The severity of the deposit losses in the third
quarter, though, placed heavy pressures on savings banks—forcing them to borrow funds from
commercial banks, to reduce their liquid assets
by a sizable further amount, and to sell some
corporate bonds. Even with this liquidation of
other assets, the net increase in mortgages during the quarter was the smallest for any quarter
in the preceding 3 years.
Throughout most of 1974 mutual savings
banks reduced the amount of their outstanding
commitments to make mortgage loans. So few
new commitments were made during the previous quarters that holdings of mortgage debt
increased less during the fourth quarter than in
Deposit mix, MUTUAL SAVINGS BANKS: 1974
Net change, billions of dollars
1.5
Time
1.0
IL
Kr
H
i
Passbook-type ^ H
i
-2L
02
Not seasonally adjusted.
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i
03
•01
59
the previous 3 months. Meanwhile, liquid asset
holdings increased only slightly because the
improvement in deposit flows in the fourth
quarter was relatively modest.
All of the growth in mutual savings bank
deposits was in time deposit accounts—as it had
been at savings and loan associations. Reports
indicate that much of the growth in time deposits
was concentrated in 4-year certificates. For the
year as a whole, deposits in passbook accounts
actually declined.
CREDIT UNIONS
Growth of deposits at credit unions in 1974
fluctuated in much the same way as at mutual
savings banks and savings and loan associations—but around a significantly higher trend.
During the first quarter deposits at credit unions
were growing at an annual rate of more than
15 per cent. By the third quarter, when the
impact of high market interest rates was the
strongest, deposits at credit unions grew at an
annual rate of 9 per cent.
The ability of credit unions to sustain a high
rate of deposit inflows reflects several factors.
For one, most credit unions are organized for
the employees of a particular firm or institution
and hence are located in or near the individual's
place of work; this makes it convenient for
individuals to save. Also, accounts are smaller,
on the average, than those at other thrift institutions, and holders of smaller accounts tend to
be less interest sensitive. Moreover, many credit
union members have funds automatically deducted from their paychecks, and most individuals do not change their payroll deductions very
often. Finally, credit unions pay higher deposit
rates, up to 7 per cent, on their only type of
account—passbook savings. Higher rates are
possible because these institutions generally
make only relatively short-term consumer loans
with relatively high rates of return. Other nonbank thrift institutions have asset portfolios that
consist largely of long-term mortgages, many
of which were made when mortgage interest
rates were at much lower levels.