Federal Savings and Loans: Functions, History, and Its Impact
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Summary:
Federal savings and loans, or S&Ls, play an important role in the financial system. This article explores their functions, history, and differences from commercial banks. We’ll also look at the regulatory developments that have occurred, giving us a better understanding of the S&L landscape.
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What is a federal savings and loan (S&L)?
Federal savings and loans, or S&Ls, are financial institutions that specialize in offering checking and savings accounts, loans, and residential mortgages to clients. Often referred to as thrift stores, they are usually community-based and co-owned by their consumers. This article investigates their structure, operations, and the regulatory changes that have occurred throughout the years.
How do federal savings and loans (S&Ls) work?
Currently, clients rather than stockholders own and manage the majority of S&Ls, which are federally chartered community-based organizations. Their primary concentration is on residential mortgages, loans, and basic banking and savings services, such as checking and savings accounts and certificates of deposit (CDs). Customers join and contribute to a pool of resources, which allows them to get better deals on credit and savings products.
The concept of federal savings and loans dates back to the building and loan associations that existed before the Great Depression. These associations employed a share-accumulation strategy in which members purchased shares in the organization, allowing them to borrow against the value of these shares to acquire properties.
The history and evolution of federal savings and loans
The history of federal savings and loans, sometimes known as S&Ls, is an interesting journey that highlights changes in the financial industry and regulatory landscape over time.
Roots in building and loan associations.
S&Ls originated with the building and lending societies that existed before the Great Depression. These associations used a share-accumulation strategy in which members agreed to buy shares in the association. In exchange, customers were granted the ability to borrow against the value of their shares, primarily for the purchase of a property.
The government intervened during the Great Depression.
As the Great Depression took its toll on the financial sector, many building and loan associations began to struggle. In response, the Hoover and Roosevelt administrations intervened to restructure the industry. The government granted charters to federal savings and loans and formed the Federal Home Loan Banking (FHLB) system. This system was put in place to maintain liquidity.
Insurance and regulatory changes
During this time, the Federal Savings and Loan Insurance Corporation (FSLIC) was in charge of insuring deposits in federally authorized savings and loans. This assured depositors that they would not incur losses. However, following a regulatory revision in 1989, the Federal Deposit Insurance Corporation (FDIC) took over deposit insurance.
As of June 2022, there were 593 FDIC-insured savings institutions, demonstrating the significance of federal insurance for financial stability.
After World War II, S&Ls faced regulatory hurdles.
The post-World War II era saw the zenith of thrift stores’ dominance, with the total number of S&Ls reaching 6,071 in 1965. However, issues arose when Congress reduced the interest rates that S&Ls and commercial banks could give on depository accounts in 1966. This limitation jeopardizes their progress.
When interest rates began to rise in the 1970s, customers moved funds from savings and loans in favor of higher-yielding accounts. Furthermore, with the economy sluggish, thrift stores had fewer borrowers who qualified for loans.
Deregulation and mismanagement throughout the 1980s
Legislators passed measures to deregulate S&Ls in the early 1980s, attempting to address the issues they face. These developments enabled S&Ls to provide a wider range of products and employ less stringent accounting methods. However, rather than improving their issues, these improvements appeared to contribute to an increase in incidences of mismanagement and fraud later in the decade.
By 1990, the government calculated that S&L malfeasance had cost the American taxpayer up to $75 billion.
Creation of the Office of Thrift Supervision
In 1989, in response to the savings and loan crisis, the government established the Office of Thrift Supervision to reestablish stricter supervision. As a division of the Treasury Department, this regulatory agency was instrumental in assuring the security and stability of member savings and loans. In 2011, however, it ceased operations, and its responsibilities were consolidated with those of other agencies.
Although S&Ls managed to endure the crisis, their prevalence has diminished considerably since their zenith in the 1960s.
Federal savings and loans (S&Ls) vs. commercial banks
The operation of federal savings and loan institutions may be conducted via shareholder ownership or mutual ownership.
Borrowers and depositors of an S&L own it jointly in accordance with the mutual ownership model. A group of shareholders, on the other hand, establishes an S&L that possesses every share in the cooperative.
In contrast to this, a board of directors typically owns and oversees commercial banks. Additionally, commercial banks provide a broader selection of services, such as credit cards, wealth management solutions, and business loans.
S&L focuses on residential mortgages
S&Ls primarily target the residential mortgage market. Legally, they can only lend up to 20% of their assets for commercial loans. Furthermore, to qualify for Federal Home Loan Bank funding, S&Ls must demonstrate that 65% of their assets are invested in residential mortgages and other
Frequently asked questions
1. Are Federal Savings and Loans (S&Ls) still relevant today?
Yes, S&Ls are still relevant today. They continue to provide affordable mortgages and basic banking services to some groups, despite their evolution and challenges.
2. How do S&Ls impact the housing market?
S&Ls have a significant impact on the housing market by providing funding for residential mortgages. They help individuals and families achieve homeownership by offering competitive mortgage rates and terms.
3. Can anyone become a member of a Federal Savings and Loan (S&L)?
Most S&Ls allow individuals to become members and customers. However, eligibility criteria may vary from one institution to another. It’s advisable to check with your local S&L to understand their membership requirements.
4. What is the role of government regulation in S&Ls?
Government regulation plays a crucial role in ensuring the stability and integrity of S&Ls. The regulatory changes made in the wake of the 1980s savings and loan crisis serve to safeguard depositors and maintain the stability of these financial institutions.
5. Can S&Ls offer services beyond mortgages and basic banking?
S&Ls are primarily focused on residential mortgages and basic banking services. While regulatory changes have allowed them to offer a broader range of products, they tend to maintain their core focus on mortgage lending and related services.
Key takeaways
Key takeaways
Key takeaways
- Federal savings and loan institutions were formed as a result of the regulatory movement that followed the Great Depression.
- These entities focus on low-cost funding for mortgages as well as savings and checking accounts.
- The Office of Thrift Supervision began regulating these institutions as a result of the savings and loan crisis.
- The Federal Deposit Insurance Corporation is now insuring S&L deposits.
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