1)Savings associations
2)Savings banks
3)Credit unions
First created in the early 1800s in response to the commercial banks' failure to adequately serve the needs of individuals requiring borrowed funds to purchase homes. Similar to commercial banks, they provide important residential mortgages and other lending services to households.
The saving associations made long term residential mortgages usually backed by the short-term deposits of small savers. For most of the post-World War II period the upward sloping yield curve meant that the rate of long-term mortgages exceeded the rates they paid on the short-term deposit liabilities.
During the October 1979 and October 1982 period, the Federal Reserve radically changed its monetary policy strategy by targeting bank reserves rather than interest rates. This led to a sudden and dramatic surge in interest rates, with rates on T-bills and bank certificates of deposits rising as high as 16 percent.
Short-term rates and cost of funds increased
First, many saving associations faced negative interest spreads, as the short-term interest expense was too high
Second, they had to pay more competitive interest to retain existing customers to prevent disintermediation, which means withdrawal of deposits from depository institutions to be reinvested elsewhere such as the money market mutual funds
Actions taken by the saving associations:
1) On the liability side, savings association issued more market rate-sensitive liabilities such as money market deposit accounts to limit disintermediation and compete with mutual funds.
2) On the asset side, they were allowed to offer floating or adjustable-rate mortgages and, to a limited extent, expand into consumer real estate development and commercial lending.
In mid-1980s, real estate and land prices in Texas and Southwest collapsed. It was then followed by economic downturns in other parts of the US. Many borrowers with mortgage loans issued by savings associations defaulted. This caused a great number of saving association failures.
Savings Banks
They were established as mutual organizations (mutual organization is an institution in which the liability holders are also the owners) in states that permit such organizations, which were similar to the savings associations. They were also badly influenced by the crash in New England real estate values in 1990-1991. Like savings associations, savings banks also decreased a lot in both size and number.
In general, savings banks rely more on deposits than savings associations and therefore savings bank have fewer borrowed funds. Savings banks have been allowed greater freedom to diversify into corporate bonds and stocks. These are the main differences of savings banks from savings associations.
The regulators of savings institutions
1)The Office of Thrift Supervision
2)The Federal Deposit Insurance Corporation
3)Other regulators
The Office of Thrift Supervision
Established in 1989, this office charters and examines all federal savings institutions. It also supervises the holding companies of savings institutions.
The Federal Deposit Insurance Corporation (FDIC)
It oversees and manages the Savings Association Insurance Fund (SAIF). The SAIF provides insurance coverage for savings associations. Savings banks are insured under the FDIC's Bank Insurance Fund and are thus also subject to supervision and examination by the FDIC.
Other Regulators
State chartered savings institutions are regulated by state agencies. Recent performance of Saving Association and Savings Bank
Like commercial banks, savings institutions experienced record profits in the mid-to late 1990s as interest rates remain low and the U.S. economy prospered. It is because the spread of interest income and the interest expense of the institutions increased, resulting an increase in profit.
Savings institutions have experienced substantial consolidation in the 1990s.
Credit Unions
Credit Unions are not-for-profit depository institutions mutually organized and owned by their members.
The primary objective of credit unions is to satisfy the depository and borrowing needs of their members. CU member deposits are used to provide loans to other members in need of funds.
Earnings from these loans are used to pay interest on member deposits. Because credit unions are not-for-profit organizations, their earnings are not taxed. This allows CUs to offer higher rates of deposits and charge lower rates on some types of loans compared to banks and saving institutions, whose earnings are taxable.
Credit unions are the most numerous of the institutions that comprise the depository institutions segment of the FI industry. Moreover, CUs were less affected by the crisis that affected the commercial banks and saving institutions in the 1980s. This is because more than 40 percent of their assets have been in small consumer loans, often for amounts less than $10000, which are funded mainly by member deposits.
This combination of relatively matched credit risk and maturity in the asset and liability portfolios left credit unions less exposed to credit and interest rate risk than commercial banks and savings institutions.
Regulations of CUs
CUs can be federally and state chartered. The National Credit Union Share Insurance Fund covers 98 percent of all credit union deposits. The deposits insurance guarantees up to $100,000 for insured credit unions. |
