Savings Associations and Credit Unions

1. Savings Associations and Credit Unions Chapter 16 © 2003 South-Western/Thomson Learning

2. 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

3. Savings Associations • Created to encourage personal thrift by generating returns for depositors • Took two forms: • savings banks • savings and loan associations

4. 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) • 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)

5. 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

6. 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.

7. Savings & Loan vs Savings Banks S&LsSavings 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

8. 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

9. 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

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

11. 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

12. 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 • 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

13. 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

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

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

16. 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

17. 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

18. 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

19. 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

20. 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 • Share Certificates • Credit union equivalent of a CD

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