Nonbank Thrift Institutions: Savings

1
Nonbank Thrift InstitutionsSavings Loan
Associations, Savings Banks, Credit Unions, and
Money Market Funds
16
C h a p t e r
Money and Capital Markets
Financial Institutions and Instruments in a
Global Marketplace
Eighth Edition
Peter S. Rose
McGraw Hill / Irwin
Slides by Yee-Tien (Ted) Fu
2
? Learning Objectives ?

• To see the significant roles that thrift
  institutions play in the functioning of a modern
  economy and financial system.
• To learn about the types of services that thrift
  institutions offer to the public and who their
  principal competitors are.
• To understand the principal similarities and
  differences among the major types of thrift
  institutions.

3
Introduction

• Nonbank financial institutions play a vital role
  in the flow of money and credit within the
  financial system, especially the home mortgage
  market and the market for personal savings.
• Recently however, both bank and nonbank financial
  institutions are converging in terms of the
  services they offer and the markets they serve.

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Savings and Loan Associations

• Savings and loan associations (SLs) are among
  the largest of all thrift institutions, accepting
  deposits and extending loans and other services
  primarily to household customers.
• SLs emphasize longer-term loans, especially
  mortgage loans.

5
Savings and Loan Associations

• SLs began essentially as a single-product
  industry in the early 19th century, accepting
  savings deposits from middle-income individuals
  and families and lending those funds to home
  buyers.
• Later, competition from other financial
  institutions, deregulation, and many failures,
  forced SLs to diversify their operations and
  aggressively solicit new customers.

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Savings Institutions
16 - 6
Source Board of Governors of the Federal Reserve
System
7
Savings Institutions
Billions
Total Financial Assets
Total Deposits
Data Source Board of Governors of the Federal
Reserve System
8
Savings and Loan Associations

• The size of the savings industry peaked in 1988,
  when total financial assets reached 1,640
  billion.
• The sharp decline that followed was the result of
  large numbers of failures and the conversion of
  some SLs into other kinds of financial
  institutions, most notably commercial banks and
  savings banks.

9
Savings and Loan Associations

• One primary cause for the low profitability of
  SLs during the 1980s and 1990s was that many SL
  assets (fixed-rate mortgage loans) were
  interest-rate insensitive while most of their
  liabilities (deposits) were highly sensitive to
  interest rates.
• So, during periods of rapidly rising market
  interest rates, the industrys net interest
  margin were severely squeezed.

10
Savings and Loan Associations

• SLs need
• sound diversification decisions,
• carefully managed loan portfolios,
• risk management, and
• further relaxation of government regulations.
• Today, more aggressive SLs are branching out in
  at least three different directions real estate
  models, family financial centers, and diversified
  models.

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Savings Banks

• Savings banks began in Scotland in the early 19th
  century, and then took root in the U.S. about 150
  years ago to meet the needs of the small saver.
• Like SLs, they play an active role in the
  residential mortgage market. However, they are
  more diversified in their investments, purchasing
  corporate bonds and common stock, making consumer
  loans, and investing in commercial mortgages.

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Savings Banks

• The number of savings banks operating today is
  small at most a few hundred.
• They are scattered throughout the U.S., though
  they are most prominent in the New England and
  the Middle Atlantic states.
• The distinction among SLs, savings banks, and
  commercial banks is becoming blurred, especially
  because they are readily convertible from one
  form to another.

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Savings Institutions
16 - 13
Source Board of Governors of the Federal Reserve
System
14
Savings Banks

• The savings bank industry faces a number of
  problems that will significantly affect its
  future as a conduit for savings and investment.
• In particular, savings banks have inflexible
  asset structures and face competition from other
  financial institutions.
• Their future growth depends on their ability to
  gain the necessary changes in government
  regulations to allow them to respond to changing
  financial market conditions.

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Credit Unions

• Credit unions are cooperative, self-help
  associations of individuals, and savings deposits
  and loans are offered only to members of each
  association.
• Credit unions came to the U.S. in 1909, and their
  long-run survival stems mainly from their being
  able to offer low loan rates and high deposit
  interest rates and from their relatively low
  operating costs.

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Credit Unions

• Credit unions are organized around a common
  affiliation or bond among their members. Most
  members work for the same employer, or for one of
  a group of related employers.
• There is a strong shift today toward fewer, but
  larger, credit unions. The decline is due
  primarily to mergers, failures, and a structural
  shift in the U.S. economy from manufacturing
  industries toward more service industries.

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U.S. Credit Union Statistics
Data Source Credit Union National Association
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Credit Unions

• U.S. credit unions are under intense pressure to
  develop new services and penetrate new markets
  due to increasing competition from other
  financial institutions and a decline in the
  demand for their historically most important
  credit service automobile loans.
• However, the industry has repeatedly shown its
  capacity for service innovation and its ability
  to compete successfully for both consumer loans
  and savings accounts.

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Credit Unions
16 - 19
Source Board of Governors of the Federal Reserve
System
20
Money Market Funds

• In 1972, the first money market mutual fund a
  financial intermediary pooling the savings of
  individuals and businesses and investing those
  monies in short-term, high-quality money market
  instruments opened for business.
• The fund offered share accounts whose yields
  reflect prevailing money market rates. In
  contrast, the interest rates on most bank
  deposits were then restrained by government
  regulation.

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Money Market Funds
16 - 21
Source Board of Governors of the Federal Reserve
System
22
Money Market Funds

• On the whole, money market funds hold
  high-quality assets. The short maturity of the
  assets results in a highly liquid security
  portfolio that can be adjusted quickly to suit
  changing market conditions.
• They are mostly no load funds there is no
  commission charge for opening an account,
  purchasing more shares, or redeeming shares. The
  accounts can be accessed easily too.

Data Source Board of Governors of the Federal
Reserve System
23
Money Market Funds

• Today, money market funds serve as
• cash-management vehicles where market rates can
  be earned on funds used for daily transactions
• tax-sheltering vehicles (when tax-exempt funds
  are chosen)
• a temporary repository for liquid funds and
• a safety haven for savings.

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Money Market Funds

• However, note that money market fund share
  accounts are not government insured.
• The differential between the yield on the
  accounts and the rate of return on money market
  deposits at banks has also narrowed in recent
  years.

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Money and Capital Markets in Cyberspace

• More information on savings and loan associations
  and savings banks can be found at
  http//www.ots.treas.gov/ and http//www.fdic.gov/
  .
• Websites for the credit union industry include
  http//www.ncua.gov/, http//www.cuna.org/,
  http//www.woccu.org/, http//www.culand.com/,
  and http//www.cujournal.com/.
• Money market funds are discussed on sites like
  http//www.smartmoney.com/ and money.cnn.com.

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Chapter Review

• Introduction
• Savings and Loan Associations
• Origins
• How Funds Are Raised and Allocated
• Trends in Revenues and Costs
• Possible Remedies for the Industrys Problems

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Chapter Review

• Savings Banks
• Number and Distribution
• How Funds Are Raised and Allocated
• Current Trends and Future Problems
• Credit Unions
• Credit Union Membership
• Size of Credit Unions
• New Services Offered
• A Strong Competitive Force

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Chapter Review

• Money Market Funds