Chapter Fourteen
Other Lending
Institutions: Savings
Institutions, Credit
Unions, and Finance
Companies 8-1
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Savings Institutions (SIs)
• Historically referred to as Savings and Loans
(S&Ls)
• Savings banks (SBs) appeared in the 1980s
• Specialize in long-term residential mortgages,
which are usually financed with short-term
deposits of small savers
• Faced a huge crisis during the 1982-1992 period
that saw over half of all SIs fail
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The S&L Crisis of 1982-1992
• Some 4,000 SIs existed at the end of the 1970s
• By 2007, only 1,257 SIs exist
• The Federal Reserve radically changed its
monetary policy during October 1979 to October
1982
–
–
–
–
targeted reserves rather than interest rates
led to sudden surge in interest rates
many SIs faced negative spreads
SIs lost depositors because of Regulation Q
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The S&L Crisis of 1982-1992
• Depository Institutions Deregulations and Monetary
Control Act (DIDMCA) of 1980 and Garn-St. Germain
Depository Institutions Act (GSGDIA) of 1982
addressed the crisis
– allowed interest-bearing transaction accounts
– allowed SIs to offer floating- or adjustable-rate mortgages
– allowed expansion into real estate development and commercial
lending
– some SIs chose to invest in the junk bond market and suffered
large losses when the junk bond market collapsed in the mid1980s
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The S&L Crisis of 1982-1992
• Real estate and land prices collapsed in many areas of the
U.S. in the mid-1980s
– many mortgages defaulted as a result
• The Federal Savings and Loan Insurance Corporation
(FSLIC) had a policy of regulatory forbearance
– i.e., its policy was to not close economically insolvent FIs,
allowing them to continue to operate
• 1,248 SIs failed in the 1982 to 1992 period
– the FSLIC became massively insolvent as a result
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The S&L Crisis of 1982-1992
• The Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) of 1989
– abolished the FSLIC
– created a new Savings Association Insurance Fund (SAIF) that
was put under the management of the Federal Deposit Insurance
Corporation (FDIC)
– replaced the Federal Home Loan Bank Board with the Office of
Thrift Supervision (OTS)
– created the Resolution Trust Corporation (RTC) to close and
liquidate insolvent SIs
– the Qualified Thrift Lender Test (QTL) sets a floor on the
mortgage-related assets that thrifts must hold (currently at 65%)
– introduced Prompt Corrective Action (PCA), which mandates
that regulators must close problem banks and thrifts faster
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SI Balance Sheets (2007)
• Mortgages and mortgage backed securities (MBSs)
represent 73.2% of total assets
– compares to 33.7% for commercial banks
• Commercial loans represent 3.9% of total assets
– compares to 11.7% for commercial banks
• Consumer loans represent 5.0% of total assets
– compares to 8.4% for commercial banks
• Cash and investment securities represent 10.1% of total
assets
– compares to 32.3% for commercial banks
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SI Balance Sheets (2007)
• Transaction accounts and small time deposits are the
predominant source of funds for SIs
– total deposits account for 65.9% of total liabilities and net worth
• The second most important source of funds is borrowings
from the 12 Federal Home Loan Banks (FHLBs)
• Net worth is the book value of the equity holders’ capital
contribution
– 11.9% compares to 10.1% for commercial banks
– most SIs were historically mutual organizations
– many have switched to stock charters in order to more easily
attract capital investment
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Regulation of SIs
• The primary regulator of nationally chartered SIs
is the Office of Thrift Supervision (OTS)
– established in 1989 under the FIRREA
• State agencies regulate state chartered SIs
• The FDIC oversees the deposit insurance fund of
SIs
– the Savings Association Insurance Fund (SAIF)
from 1989 to 2007
– the Deposit Insurance Fund (DIF) since January
2007
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Recent Trends for SIs
• Experienced record profits in the mid- to late1990s as interest rates were low and the U.S.
economy prospered
• Like commercial banks, SIs experienced
substantial consolidation in the 1990
• The downturn in the U.S. economy eroded SIs’
profitability in 2000
• The subprime mortgage crisis of the mid-2000s
has hit SIs quite hard
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Credit Unions (CUs)
• Not-for-profit depository institutions mutually organized
and owned by their members (depositors)
• First established in the early 1900s as self-help
organizations
– members deposit savings and the funds are lent to other members
• CUs are prohibited from serving the general public—i.e.,
members are required to have a common bond of
occupation, association, etc.
• Because CUs are not-for-profit, their earnings are not
taxed
– offer higher interest rates than commercial banks on deposits
– charge lower interest rates than commercial banks on loans
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Credit Unions (CUs)
• Most numerous of all depository institutions:
8,329 CUs in 2007
• Less affected by the crisis of the 1980s that hit SIs
and CBs hard
– traditionally, more than 40% of their assets are in small
consumer loans
– loans are funded with deposits
– tend to hold large amounts of government securities as
assets
– hold small amounts of residential mortgages
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Credit Unions (CUs)
• National credit union system consists of three
tiers
– U.S. Central Credit Union is the top tier
• provides investment and liquidity services to Corporate CUs
– 34 Corporate Credit Unions comprise the middle tier
at the state or regional level
• cooperatively owned by their member CUs
• serve members by investing and lending excess funds that
member CUs place with them
• provide settlement services, securities safekeeping, etc.
– individual credit unions make up the bottom tier
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Credit Unions (CUs)
• Recently CUs have expanded their services to compete
with CBs and SIs
– many have converted to a common charter to expand their
customer base
– now offer mortgages, credit lines, and ATMs
– some offer business and commercial loans to their employer
groups
• Banking industry challenged CU expansion in 1997
– Supreme Court sided with the banking industry
– Congress quickly passed a bill that sided with CUs
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CU Balance Sheets (2007)
• Total assets of all CUs is less than the total assets of the
single largest commercial bank
– total assets of all CUs is $748.3 billion
– total assets of Citigroup alone is $2,358.3 billion
• Consumer loans represent 31.8% of total assets
– compares to 8.4% at CBs and 5.0% at SIs
• Home mortgages represent 40.2% of total assets
– compares to 33.7% at CBs and 73.2% at SIs
• Investment securities represent 18.1% of total assets
– compares to 27.9% at CBs and 8.0% at SIs
– 54.7% of the investment portfolio is in U.S. government or
federal agency securities
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CU Balance Sheets (2007)
• 86.3% of total funding comes from member deposits
– compares to 65.9% for CBs and 61.1% for SIs
– share draft transaction accounts account for 36.0% of all CU
deposits
– certificates of deposit (CDs) account for 22.8% of all CU
deposits
– money market deposit accounts (MMDAs) account for 18.4%
of CU deposits
– share accounts account for 13.0% of CU deposits
• CU equity is the accumulation of past earnings that is
“owned” collectively by member depositors
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CU Regulators and Performance
• 62.1% of CUs are federally chartered
– regulated by the National Credit Union Administration
(NCUA)
– deposit insurance is provided by the National Credit Union
Share Insurance Fund (NCUSIF)
• Remaining CUS are regulated at the state level
• Assets grew by more than 10% annually from 1999 to
2007
• Membership increased from 63.6 million to 90.2 million
from 1999 to 2007
• ROA decreased from 1999 to 2007, but not a huge
concern as CUs are not-for-profit organizations
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Finance Companies (FCs)
• There are three major types of finance
companies (FCs)
– sales finance institutions specialize in loans to
customers of a particular retailer or manufacturer
– personal credit institutions specialize in installment
and other loans to consumer
– business credit institutions specialize in business
loans, especially through factoring
• factoring is the process of purchasing accounts receivables
from corporations, usually with no recourse to the seller
should the receivables go bad
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Finance Companies (FCs)
• Industry assets were $2,159.7 billion in 2007
• FC industry is highly concentrated
– the 20 largest FCs account for more than 75% of
industry assets
– many of the largest FCs are captive subsidiaries (i.e.,
wholly owned subsidiaries of parent corporations)
– GMAC Commercial Mortgage Corp., a FC subsidiary
of General Motors Acceptance Corp. (GMAC), is the
largest business unit of General Motors and is the
largest commercial lender in the U.S.
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Balance Sheets of FCs (2007)
• Business and consumer loans (called accounts
receivables) represent 54.0% of total assets
• Consumer loans include motor vehicle loans and leases
and other loans, which are often at higher interest rates
than CBs because FCs lend to riskier customers
– subprime lenders are FCs that lend to high risk customers
– loan sharks are subprime lenders that charge unfairly exorbitant
rates to desperate subprime borrowers
– payday lenders provide short-term cash advances that are often
due when borrowers receive their next paycheck
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Balance Sheets of FCs (2007)
• FCs often have advantages over CBs with respect
to business loans because FCs:
– are not subject to regulations that restrict the type of
products and services they can offer
– do not accept deposits—accordingly, bank-type
regulators do not monitor their behavior
– often have substantial industry and product expertise
– are more willing to accept risky customers
– generally have lower overhead than CBs
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Balance Sheets of FCs (2007)
• Real estate loans represent 26.1% of total assets
– second mortgages are in the form of home equity
loans, i.e., loans that let customers borrow on a line of
credit secured with a second mortgage on their home
– securitized mortgage assets are mortgages purchased
and used as assets backing secondary market securities
– mortgage servicing is a fee-related activity whereby
the flow of mortgage repayments is collected and
passed on to investors in whole mortgage loan
packages or securitization vehicles
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FC Performance and Regulators
• Problems arose in the FC industry in the mid-2000s with
the crash of the market for subprime mortgage loans
– many FCs saw sharply lower equity values
• FCs are subject to state imposed usury ceilings
• Because FCs do not accept deposits, they are not subject
to the extensive oversight that CBs, SIs, and CUs are
• FCs signal their safety and soundness to investors with
higher capital-to-assets ratios
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Global Issues
• Unlike the U.S., SIs in Europe traditionally catered to the
commercial industry
• The majority of SIs in Europe are mutually owned
• SIs worldwide are quite small compared to CBs
• Nonbank FI lending has increased in both Latin America
and in Europe in the last decade
• Postal SIs exist in about 30 countries throughout the
world, mostly in Europe
– operate virtually as full-service banks
– many post offices have savings products linked to stock markets
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