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

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

4. Slide 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. Slide 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. Slide 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. Slide 7 Savings & Loan vs Savings 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 S&Ls Savings Banks

8. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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. Slide 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)