Savings and Loans Definition
In this section we look at the activities of savings and loans (or S&L) institutions – a group of financial intermediaries, consisting of savings and loans associations, savings banks and credit unions. As can be seen from the data in Table 8.2, savings and loans institutions in 1984, has assets equal to almost two thirds of the assets of commercial banks. It is clear that their role in the financial markets is very high.
The difference between savings and loans institutions and banks in the eighties began to disappear. The Law on the Control of monetary circulation, adopted in 1980, as well as a number of other laws and regulations has allowed savings and loans institutions to carry out many of the operations that were part of the exclusive competence of the commercial banks. Savings and loans institutions were given the right to issue commercial loans (to a limited extent) and open check deposits; recently, it was previously allowed only to commercial banks, and even makes up their distinctive feature. Currently, savings and loans institutions are subordinate to the Federal Reserve System in all that concerns check deposits; they were entitled to receive a range of services Fed, including to receive discounted loans.
From the point of view of the theory of money, banks and savings and loans institutions currently very little different from each other, In subsequent chapters, in which the presentation will be conducted mainly from a macroeconomic point of view, almost any paragraph of the word “bank” is fully justified can be replaced by the words “banks and savings and loans institutions.” At the same time, a savings and loans institution has its own unique history with their own features and characteristics, and this history is still reflected in their current financial operations. Despite the fact that some of the savings and loans institutions are virtually indistinguishable from commercial banks, among them there are those who continue successfully for they occupy non-bank market niches.
Savings and loans associations
Today, savings and loans associations constitute the largest sector of all savings and loans institutions, and have the highest score. In addition, these associations – the youngest of all the actors on the stage of savings and loans business, most associations were organized after the Second World War. Government has promoted their development in order to contribute to the expansion of housing construction. In 1984, the United States, there were about 3,400 such associations. As a result of mergers acquisitions n the number now stands at about half of what it was a quarter century ago. Total assets grew associations for the same period by almost 5 times, from which we can conclude that the average modern savings and loans associations in nominal terms is about 10 times greater than those that existed in the postwar period.
Savings and loans association, charter or receive from the federal
Government or from the state government, initially, most associations functioned on the basis of “mutual” type of ownership (mutual form of ownership), to provide a co-operative company owned by its depositors (Depositary). In recent years, many associations have switched to corporate ownership. This saves them from having to actively seek sources of growth and profit in the period of deregulation of the banking sector. Owner’s investors of mutual savings and loans associations have the opportunity to buy shares on favorable terms in cases when the association goes to corporate ownership.
The balance sheet of savings and loans associations Table 8.2 shows the combined balance sheet of savings and loans associations in the United States in 1986. The report clearly reflects the unique characteristic of these institutions: they concentrate their assets primarily and mainly on granting loans secured by real estate. In the passive part of the balance of the main article – to save capital (savings capital), Thus, the association traditionally savings deposits from households and then give out loans to depositors and their neighbors to buy a home.
The active side of the balance sheet indicates a strong specialization
On the issuance of mortgage loans, the passive part of the balance is
Mainly from capital-saving, because of savings and
Term deposits of small size. Both assets and liabilities of the current
3400 Associations somewhat more diversified than it was
In the past,
Today, savings and loans associations have the right to invest a portion of its assets in commercial, agricultural and consumer loans. As follows from the data shown in Table 8.2 Association hold their assets and securities backed by real estate, as well as individual mortgages Association, also can open checking deposits and traditional savings and term deposits. However, despite the expansion of opportunities available to the association as a result of the enactment of new laws regulating the banking sector, many savings and loans associations prefer to perform a traditional operation, which distinguishes them from traditional banks.
Problems faced by savings and loans associations. Development of associations was by no means smooth and quiet. As we
Has already had the opportunity to see the assets of banks and savings and loans associations, are less liquid than their liabilities because they “take a while, and lend long.” Association in its activities built it into an absolute rule, and their assets consist mainly of long-term loans to mortgage on which the interest rate is fixed. Same liabilities consist of deposits in savings books.
In order to somehow compensate for the risk inherent in such a business strategy, as well as to promote the construction of housing, public authorities, governing the activities of the banking sector, provide savings and loans associations a privilege. Until 1980 published by the Federal Reserve Guide «Q» permitted savings and loans institutions to pay the interest rate by 0.25 percentage points more than the commercial banks. This advantage was enough to maintain a stable cash flow.
However, at times the market rate of interest escalated markedly higher interest rates on savings deposits, which encouraged the owners of shares of savings and loans associations, which are at the same time and their investors to sell their shares for cash and invest the money in something else, causing extensive outflow. Low tide means even more intensified with the development of money market mutual funds, which offer significantly more liquid savings mechanism with a specific market income. Low tide means dramatically devastated mortgage funds, which led to the housing crisis, to withdraw the state of the economy.
In the late 70’s – early 80’s transition to a policy of deregulation has enabled savings and loans institutions to compete for attracting funds at high interest rates; this, of course, does not solve all the problems of these institutions. Despite the fact that they now had the opportunity to raise funds on favorable terms for the client, their portfolios were still burdened by long-term mortgages signed in the 50s, 60s and early 70s, bringing a very small percentage. And everyone knows that the financial intermediary, who is forced to pay its liabilities more than it receives in terms of assets, incurs losses. Its share capital is melting day by day. Between 1980 and 1985, 30% of the total savings and loans associations have disappeared as a result of bankruptcies or mergers. Even today, many savings and loans associations, like the legacy of those years have very poor technical equipment of inadequacy or equity (see. 5.1 “Monetary Policy in Action”).
Savings and loans associations, Today associations are doing their best to get back to normal life. They have a whole range of new market strategies. Some almost turned into commercial banks. Other associations have remained faithful to the traditional style of doing business. Nevertheless, in general strategy of association change, they stayed savings and loans in substance, but significantly upgraded.
Modern Savings and Loans Association defends himself, as it were, “on both sides” of the balance sheet. Implementing asset management, it diversifies its activities by investing in commercial and consumer loans in. Thus, it avoids the trap caused by the practice of excessive amount
Operation mortgages with a fixed interest rate, providing mortgages with adjustable-rate mortgages. When increasing the market value of the funds, then the incomes from these mortgages are also increasing. Some (but not all) of the mortgages made out of modern savings and loans associations at a fixed rate of interest, turn them into securities for subsequent sale in the secondary markets. As for the passive operations, all the smaller part of the portfolio of liabilities is composed of small savings deposits such as deposits in the savings bank. They replaced the now-accounts, as well as a variety of small time deposits. These deposits increase the costs of associations, but earn interest comparable to other market income, which excludes the possibility of a sudden outflow of funds. Such financial institutions at a reasonable management have good prospects as members of the financial community.
Mutual savings banks
Mutual savings banks have a much longer history than the savings and loans institutions. Many of them appeared in the early 19th century. Initially, they have emerged as a kind of refuge for the meager savings of workers. Even today, the initial minimum deposits in these banks are reflected in their names: “nickels Savings Bank of Lynn,” Massachusetts, or “ten-cent Savings Bank of Brooklyn”, New York.
These savings banks originally arose on the basis of “mutual” type of ownership (i.e., ownership, close to the cooperative – approx. Ed.), as well as savings and loans associations. Instead, directors and trustees selected undisputed founders, mutual savings banks operated as a rule, authoritative representatives of the community. Profits of these banks or investors paid or used to finance the bank’s growth. Partly because of a collectivist structural organization of the majority of savings banks was financial performance even in the thirties, when hundreds of commercial banks went bankrupt.
In recent years, many mutual savings banks as well as many savings and loans associations, switched to corporate ownership.
Table 8.3 pleasant consolidated balance sheet of all mutual savings oddity US In the active part of the balance is dominated by loans secured by real estate. Savings banks are always carried out fairly large investment in the purchase of securities. Unlike commercial banks, they are now, as always, a certain amount of funds invested in stocks and corporate bonds. In the passive part of the balance of payments is traditionally dominated by deposits in savings books, but now it also contains data on all other types of deposits. Of all the savings and loans institutions, mutual savings banks were the first to accept check deposits, amounting thus competition to commercial banks; however, checking deposits is still not an important category of deposits in savings banks.
As this balance sheet savings banks specialize in granting loans secured by real estate, they also give out and other types of loans and buy significant amount of securities, including shares and bonds of industrial corporations. Deposits, as in the case of savings and loans associations, consist mainly of savings deposits and time deposits of small size; are also invited to the opening of check deposits.
In the 70s and 80s savings associations experienced considerable difficulties, though most diversified assets of several rescued. Today they are and associations become more like conventional banks, while at the same time, their activities are more focused on the consumer than the activities of commercial banks.
Savings and Loans Credit Union
Credit unions, there are more than financial intermediaries of any other type. In 1984, more than 18,000 credit unions consisted of about 53 million members. However, most credit unions are very small in size and in general they own only 2% of the assets in the accounts of all financial intermediaries.
Credit unions are cooperative savings institutions, usually organized by trade unions, employers, or just a group of individuals united by some common material interests. All credit unions appeared in Europe in the second half of the last century; in the US, the first credit unions emerged in the early 20th century.
Assets of credit unions consist mainly of consumer and personal loans issued by members of the union. Today, credit unions were granted the right to issue loans secured by real estate, but most credit unions cannot really take advantage of this right due to lack of funds. Liabilities of credit unions consist of a special kind of shares (shares), equivalent to savings deposits. Credit unions, in addition, may open checking accounts settlement drafts (share-draft accounts).
A number of specific benefits that credit unions have contributed to their rapid growth after World War II. As a consumer co-operative, credit unions belong to the category of non-profit institutions and exempt from federal income tax. In addition, they had the right to pay for their shares average dividend of 7%, while commercial banks have the right to pay only 5.25%, and savings and loan institutions – only 5.5% (all these data refer to the period preceding the deregulation of interest rates).
When granting loans to their clients credit unions also have some advantages. Because their founders are often employers or trade unions, managers of credit unions are often aware of where they are going to take money borrowers to repay loans. Many customers, including many students believe these alliances are very suitable place for the loan. Individual employers deduct payments to repay the loan of the credit union directly from your paycheck customers of credit unions. In the same way, they can deduct and contributions made to the savings deposits held at a credit union.
See Also: Home Savings and Loan