Savings Associations
and Credit Unions
Chapter 16
© 2003 South-Western/Thomson Learning
Learning Objectives

Origins, purposes and recent trends in thrifts
– mutual savings banks, savings and loans
and credit unions

Risks faced by thrifts and how they manage
these risks

Similarities and differences among the
sources and uses of funds for savings
associations and credit unions

Primary causes of the S&L crisis and the
regulatory attempts to address it
Slide 2
Savings Associations
Created to encourage
personal thrift by generating
returns for depositors
 Took two forms:
 savings banks
 savings and loan
associations

Slide 3
Savings Associations

Federal Home Loan Bank Board (FHLBB)
 Primary federal regulatory agency for savings
associations
 From 1932 to 1989
 Replaced by the Office of Thrift Supervision
(OTS)

Slide 4
Federal Savings and Loan Insurance
Corporation (FSLIC)
 Federal agency that insured deposits of member
savings associations
 From 1934 until 1989
 Replaced by FDIC’s Savings Association
Insurance Fund (SAIF)
Savings Banks

Mutual Savings Bank
 Lack stockholders
 Assets are managed to benefit its
collective owners

Stock Savings Bank
 Savings bank charter
 Ownership is held by stockholders
Slide 5
Savings & Loan Associations (S&Ls)





Purpose to pool savings of local residents to
finance construction and purchase of homes
Functioned more like modern-day mutual
funds
Over time, concepts of “saving” and “loaning”
became viewed as separate services
Regulations and insurance provided to protect
consumers
Spread rapidly, but many failed during the
1980s.
Slide 6
Savings & Loan vs Savings Banks
S&Ls




Slide 7
S&Ls located throughout
country
Deposits in most S&Ls
are insured by Savings
Association Insurance
Fund
Hold larger share of
assets in home
mortgages
Typically smaller than
savings banks in assets
and deposits
Savings Banks




Some savings banks
insured by state insurance
fund programs
Savings banks located
predominately on East
Coast
On average savings banks
hold slightly smaller share
of their assets in home
mortgages compared to
S&Ls
Savings banks are typically
larger than S&Ls in terms
of assets and deposits
Savings & Loan vs Savings Banks

Office of Thrift Supervision (OTS)
 Agency created by FIRREA to replace
Federal Home Loan Bank Board as
overseer of S&L industry
Slide 8
Savings Association Management
of Risk
Manage default, interest rate an liquidity
risks:

Adjustable- (Variable-) Rate Mortgages
 Interest rate that is adjusted up or down
as cost of funds rises or falls
Slide 9
The S&L Crisis

High interest rate of 1970s
 Primarily funded long-term mortgage loans
with short-term deposits
 When interest rates rose, positive spread
could turn negative
 Thus, savings associations exposed to a great
deal of interest rate risk

Problems increased in 1980s
 Changes in regulations compounded problems
 Severe financial crisis developed
Slide 10
 More than 1,500 institutions failed or downsized
 Industry as whole shrunk considerably
 Taxpayers spent billions to bail out industry
The S&L Crisis

Depository Institutions Deregulation and
Monetary Control Act of 1980 (DIDMCA)
 Removed many regulations enacted during the
Great Depression
 Phased out Regulation Q
 Established uniform and universal reserve
requirements
 Increased assets and liabilities depository that
institutions could hold
 Authorized NOW accounts
 Suspended usury ceilings
Slide 11
The S&L Crisis

Garn-St. Germain Act of 1982
 Along with DIDMCA, deregulated the financial
structure
 Authorized money market deposit accounts
and Super NOW accounts

Slide 12
Money Market Deposit Accounts (MMDAs)
 Financial claims with limited check-writing
privileges
 Offered by banks since 1982
 Earn higher interest than checkable deposits
 Require higher minimum balance
The S&L Crisis

1989, Financial Institutions Reform,
Recovery, and Enforcement Act (FIRREA)
 Attempted to resolve problems of widespread
failures within industry and insufficient
insurance funds to settle the crisis
 Providing funds to resolve S&L crisis
 Elimination of FHLBB system and the FSLIC
 Office of Thrift Supervision (OTS) now serves
as primary federal regulatory agency for
industry
Slide 13
The S&L Crisis

Savings Association Insurance Fund
(SAIF)
 Created by FIRREA in 1989
 Managed by the FDIC
 Provides insurance for savings
association deposits
 Replaced defunct FSLIC

Slide 14
Resolution Trust Corporation (RTC)
 Created by FIRREA in 1989
 Dispose of properties of failed S&Ls
Credit Unions

Slide 15
Cooperative, nonprofit, memberowned, tax-exempt depository
institutions operated for the
benefit of member savers and
borrowers who share common
bond.
Credit Unions

Credit Union National Extension
Board (CUNEB)
 Privately created organization formed in
1921
 To expand credit union movement
across country
 Forerunner to the CUNA
Slide 16
Credit Unions

Credit Union National Association
(CUNA)
 Largest credit union trade association in
U.S.
 Provides bulk purchases of supplies
 Provides automated payment services
 Provides credit card programs
 Provides various investment options to
member credit unions
Slide 17
Credit Unions

National Credit Union Association
(NCUA)
 Federal regulatory agency
 Charter and regulate federally chartered
credit unions and state member institutions

National Credit Union Share Insurance
Fund (NCUSIF)
 Federal agency
 Insure deposits of federally chartered credit
unions and state member institutions
Slide 18
Credit Unions

U.S. Central Credit Union
 Central bank for credit unions

Central Liquidity Facility (CLF)
 Lender of last resort for credit unions
experiencing temporary liquidity
problems
Slide 19
Credit Unions

Share Accounts
 Credit union members’ small time
savings accounts
 Highly liquid credit union deposits that
can be withdrawn on demand, but not
by writing a check

Share Draft Accounts
 Interest bearing checking accounts of
credit unions

Slide 20
Share Certificates
 Credit union equivalent of a CD
Credit Union Management of Risk
Deal with credit, interest rate and liquidity
risks:
 Default risk
 Collateral is held
 Mortgage insurance is required
 Expert credit analysis is utilized

Interest rate risk managed by:
 Adjustable rate mortgages
 Use of secondary mortgage market

Slide 21
Liquidity risk or illiquid financial position
 Dealt with by accessing funds through the Central
Liquidity Facility (CLF)