THRIFT INSTITUTIONS

1
THRIFT INSTITUTIONS

• Savings Banks
• Savings and Loan Associations
• Credit Unions

2
MISSION

• Traditionally had one mission only
• Accept small deposits and make consumer loans for
  mortgages or durables
• Restricted by regulation
• Borrow short, lend long
• Unable to change in changing economic environment

3
RESULT OF THE RESTRICTIONS?

• Deregulation, inflation, volatile interest rates
  have made them non-competitive
• Early 1980s--SL equity capital was used up by
  losses in operations
• Attempted to recover by taking risk in asset side
  decisions

4
ASSET-SIDE CHANGES

• Deregulation allowed investment in non-consumer
  oriented assets
• commercial real estate and junk bonds
• Thrifts assumed risk to increase return in order
  to restore equity accounts
• Commercial real estate market plummeted junk
  bonds had defaults
• TAX-PAYERS HAD TO PICK UP THE TAB!

5
THREE PERIODS OF FAILURES

• Early 1890s
• Great Depression
• 1980s

6
CAUSES OF FAILURES

• Deregulation of interest on savings accounts
• Should have been accompanied by increased
  supervision
• Supervision actually slackened
• FSLIC and FHLBB too closely tied to the industry
  to supervise it

7
CAUSES OF FAILURES, cont

• Interference by members of Congress to prevent
  regulatory oversight of pets
• Massive frauds by managers
• Antiquated accounting systems
• Paucity of high caliber management

8
CAUSES OF FAILURES, cont

• Extraordinary economic circumstances
• Relatively unsophisticated small-town
  organizations
• Caught unawares by high I and I
• Unsophisticated understanding of real estate
  markets, other than 1-4 family

9
CAUSES OF FAILURES, cont

• Sharp upward shift of yield curve
• Accounting rules were very odd
• Large of leveraged buyout
• High growth attempts
• Inability to handle interest rate volatility

10
ANOTHER WAY TO LOOK AT IT

• 2 dominant characteristics of thrifts
• a. Being formed as mutual associations
• b. Being created for mortgage financing

11
In the 90s????

• Neither characteristic will kill the
  industry,BUT. . .
• Lack of market supervision
• Existence of
• interest rate risk
• Massive increase in
• MBS marketplace

• Still less than 1/2 are stock companies
• Continued dependence on mortgages
• 70 in mortgages and mortgage-backed-securities
  (MBS)

12
SO WHY STUDY THEM?

• Thrifts are still an integral and important
  element in the receipt and dispersal of funds
• They serve a unique market
• Preference for individuals over corporate
  customers
• Many good thrifts are left
• Make a broad range of consumer loans

13
Mutual vs. Stock Ownership

• MUTUAL FORM
• Historical form more than half, even now
• No market oversight
• Burden on regulators
• No access to capital markets
• Allowed to convert
• Managers often behave conservatively

• STOCK FORM
• Subject to oversight by SEC
• SLHC can enter other lines of business
• Unitary or multiple HC
• Access to capital markets
• Conversion costs are high

14
CONVERSION GUIDELINES

• Independent appraisals set value
• Depositors (90 days) offered shares
• Pro rata basis
• Unpurchased shares can be offered to public

15
RESTRUCTURING

• Find new models for management
• Use new tools
• Restructure existing portfolios
• Cross marketing of different products