Savings Associations and Credit Unions

Savings Associations and Credit Unions

Chapter 16

© 2003 South-Western/Thomson Learning

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Learning ObjectivesLearning 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

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Savings AssociationsSavings Associations

Created to encourage personal thrift by generating returns for depositors

Took two forms:savings bankssavings and loan

associations

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Savings AssociationsSavings 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) 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)

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Savings BanksSavings 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

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Savings & Loan Associations (S&Ls)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.

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Savings & Loan vs Savings BanksSavings & Loan vs Savings Banks

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

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

S&Ls Savings Banks

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Savings & Loan vs Savings BanksSavings & 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

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Savings Association Management of RiskSavings 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

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The S&L CrisisThe 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

More than 1,500 institutions failed or downsized Industry as whole shrunk considerably Taxpayers spent billions to bail out industry

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The S&L CrisisThe 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

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The S&L CrisisThe 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 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

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The S&L CrisisThe 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

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The S&L CrisisThe 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

Resolution Trust Corporation (RTC) Created by FIRREA in 1989 Dispose of properties of failed S&Ls

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Credit UnionsCredit Unions

Cooperative, nonprofit, member-owned, tax-exempt depository institutions operated for the benefit of member savers and borrowers who share common bond.

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Credit UnionsCredit Unions

Credit Union National Extension Board (CUNEB) Privately created organization formed in

1921 To expand credit union movement

across country Forerunner to the CUNA

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Credit UnionsCredit 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

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Credit UnionsCredit 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

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Credit UnionsCredit 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

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Credit UnionsCredit 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 Share Certificates

Credit union equivalent of a CD

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Credit Union Management of RiskCredit 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

Liquidity risk or illiquid financial position Dealt with by accessing funds through the Central Liquidity Facility (CLF)