chapter 15 nonbank thrift institutions: savings and loans, savings banks, credit unions, and money...
TRANSCRIPT
Chapter 15Chapter 15
Nonbank Thrift Institutions: Nonbank Thrift Institutions: Savings and Loans, Savings Savings and Loans, Savings Banks, Credit Unions, and Banks, Credit Unions, and
Money Market Funds Money Market Funds
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Learning Objectives Learning Objectives
To see the significant roles that thrift To see the significant roles that thrift institutions play in the functioning of a institutions play in the functioning of a modern economy and financial system.modern economy and financial system.
To learn about the types of services that To learn about the types of services that thrift institutions offer to the public and thrift institutions offer to the public and who their principal competitors are.who their principal competitors are.
To understand the principal similarities To understand the principal similarities and differences among the major types and differences among the major types of thrift institutions.of thrift institutions.
15-3
IntroductionIntroduction
Nonbank financial institutions play a Nonbank financial institutions play a vital role in the flow of money and credit vital role in the flow of money and credit within the financial system, especially within the financial system, especially the home mortgage market and the the home mortgage market and the market for personal savings.market for personal savings.
Recently however, both bank and Recently however, both bank and nonbank financial institutions are nonbank financial institutions are “converging” in terms of the services “converging” in terms of the services they offer and the markets they serve.they offer and the markets they serve.
15-4
Savings and Loan AssociationsSavings and Loan Associations
Savings and loan associationsSavings and loan associations (S&Ls) (S&Ls) Among the largest of all thrift institutions Among the largest of all thrift institutions
Accepting depositsAccepting deposits Extending loansExtending loans Other servicesOther services Primarily to household customersPrimarily to household customers
S&Ls emphasize longer-term loans, S&Ls emphasize longer-term loans, especially mortgage loansespecially mortgage loans
15-5
Savings and Loan AssociationsSavings and Loan Associations
S&Ls began in the 18S&Ls began in the 18thth century century British building societiesBritish building societies Principal of “neighbors helping neighbors”Principal of “neighbors helping neighbors” Often referred to as Often referred to as building and loan societiesbuilding and loan societies Accepting savings deposits from individuals Accepting savings deposits from individuals
and families and lending those funds to home and families and lending those funds to home buyersbuyers
Frequently disbanded after all member had Frequently disbanded after all member had received loansreceived loans
The first U.S. S&L was in the Philadelphia The first U.S. S&L was in the Philadelphia area in 1831area in 1831
15-6
Savings and Loan AssociationsSavings and Loan Associations
Early S&Ls were managed and directed Early S&Ls were managed and directed by depositorsby depositors Larger depositors often had greater Larger depositors often had greater
influenceinfluence Over time the S&Ls became major players Over time the S&Ls became major players
in the financial marketplacein the financial marketplace Often savers and borrowers were different Often savers and borrowers were different
groupsgroups Professional managers were hiredProfessional managers were hired Investors in the money and capital markets Investors in the money and capital markets
provided much of the financingprovided much of the financing15-7
Savings and Loan AssociationsSavings and Loan Associations
Originally a one-product industryOriginally a one-product industryHas been forced to diversify and Has been forced to diversify and
become more aggressivebecome more aggressive More competitionMore competition DeregulationsDeregulations Many failuresMany failures
15-8
Savings and Loan AssociationsSavings and Loan Associations
Savings and loans can take two different Savings and loans can take two different organizational formsorganizational forms Mutual S&LsMutual S&Ls
Owned by depositorsOwned by depositors Many have converted to stock structuresMany have converted to stock structures
Stockholder-owned S&LsStockholder-owned S&Ls Issue capital stock to increase net worthIssue capital stock to increase net worth Very valuable when funding is needed for Very valuable when funding is needed for
rapid growthrapid growth Tend to be larger than mutualsTend to be larger than mutuals
15-9
Savings and Loan AssociationsSavings and Loan Associations
15-10
Savings and Loan AssociationsSavings and Loan Associations
LiabilitiesLiabilities Savings provide most of fundingSavings provide most of funding Significant shift in deposit mixSignificant shift in deposit mix
Away from low-cost savings accountsAway from low-cost savings accounts To deposits earning higher ratesTo deposits earning higher rates
MMDA CDs NOW and SNOW Keogh and IRA
Also use nondepository fundsAlso use nondepository funds15-11
Savings and Loan AssociationsSavings and Loan Associations
15-12
Savings and Loan AssociationsSavings and Loan Associations
The size of the industry peaked in 1988The size of the industry peaked in 1988 Total financial assets reached $1,640 billionTotal financial assets reached $1,640 billion The sharp decline that followed The sharp decline that followed
Result of large numbers of failuresResult of large numbers of failures Many were unprofitable Many had little net worth
Conversion of some S&Ls into other kinds of Conversion of some S&Ls into other kinds of financial institutionsfinancial institutions
Others were merged into other financial Others were merged into other financial institutionsinstitutions
15-13
Savings and Loan AssociationsSavings and Loan Associations
Primary cause for the low profitability Primary cause for the low profitability Many S&L assets (fixed-rate mortgage Many S&L assets (fixed-rate mortgage
loans) were interest-rate insensitive loans) were interest-rate insensitive Most of their liabilities (deposits) were Most of their liabilities (deposits) were
highly sensitive to interest rateshighly sensitive to interest rates
During periods of rapidly rising market During periods of rapidly rising market interest rates, the industry’s net interest interest rates, the industry’s net interest margin were often severely squeezedmargin were often severely squeezed
15-14
Savings and Loan AssociationsSavings and Loan Associations
S&Ls needS&Ls need Sound diversification decisionsSound diversification decisions Carefully managed loan portfoliosCarefully managed loan portfolios Risk managementRisk management Further relaxation of government regulationsFurther relaxation of government regulations
S&L management today more aggressiveS&L management today more aggressive Branching out in multiple directions Branching out in multiple directions
Real estate modelReal estate model Family financial centers Family financial centers Diversified modelDiversified model
15-15
Savings BanksSavings Banks
Savings banksSavings banks began in Scotland began in Scotland 1810 by Reverend Henry Duncan, minister of 1810 by Reverend Henry Duncan, minister of
Ruthwell Church in DumfriesshireRuthwell Church in Dumfriesshire Customer-owned institutionsCustomer-owned institutions Originally set up to combat povertyOriginally set up to combat poverty Until then savers shut out of credit market Until then savers shut out of credit market
Idea spread rapidlyIdea spread rapidly Particularly in Europe and East Coast of U.S.Particularly in Europe and East Coast of U.S. First savings bank in the U.S.First savings bank in the U.S.
Philadelphia Savings Fund SocietyPhiladelphia Savings Fund Society Appeared in 1816Appeared in 1816
15-16
Savings BanksSavings Banks
Historically focused on two instrumentsHistorically focused on two instruments Savings accountsSavings accounts Residential mortgage loansResidential mortgage loans
Today they have expanded their Today they have expanded their servicesservices Trading corporate and government bondsTrading corporate and government bonds Offering credit and debit cardsOffering credit and debit cards Granting construction loansGranting construction loans Granting consumer installment loansGranting consumer installment loans
15-17
Savings BanksSavings Banks
The number of savings banks is small The number of savings banks is small There were 1300 in 2005There were 1300 in 2005 Scattered throughout the United StatesScattered throughout the United States Massachusetts leads the list of states with the Massachusetts leads the list of states with the
most savings banks, followed by New Yorkmost savings banks, followed by New YorkThe distinction among S&Ls, savings The distinction among S&Ls, savings
banks, and commercial banks is banks, and commercial banks is becoming blurred, especially because becoming blurred, especially because they are readily convertible from one form they are readily convertible from one form to anotherto another
15-18
Savings BanksSavings Banks
Savings banks can be state or Savings banks can be state or federally regulatedfederally regulated The primary rule-maker is the Office of The primary rule-maker is the Office of
Thrift Supervision (OTS)Thrift Supervision (OTS) Regulate both S&Ls and savings banksRegulate both S&Ls and savings banks Established in the U.S. Treasury Established in the U.S. Treasury
Department in 1989Department in 1989 Supervisory activities supported by Supervisory activities supported by
assessments and feesassessments and fees
15-19
Savings BanksSavings Banks
Owned by their depositorsOwned by their depositorsKey asset is mortgage-related assetsKey asset is mortgage-related assets
Most are direct mortgage loansMost are direct mortgage loans To build single-family homeTo build single-family home ApartmentsApartments Etc.Etc.
The rest are pass through securitiesThe rest are pass through securities A distinct second is nonmortgage loansA distinct second is nonmortgage loans
Key financing is through depositsKey financing is through deposits15-20
Savings BanksSavings Banks
The savings bank industry faces a number The savings bank industry faces a number of challengesof challenges Savings banks have inflexible asset structures Savings banks have inflexible asset structures Face competition from other financial Face competition from other financial
institutionsinstitutionsTheir future growth depends on their ability Their future growth depends on their ability
to gain the necessary changes in to gain the necessary changes in government regulations to allow them to government regulations to allow them to respond to changing financial market respond to changing financial market conditionsconditions
15-21
Credit UnionsCredit Unions
Credit unionsCredit unions are cooperative, self-help are cooperative, self-help associations of individualsassociations of individuals Deposits and loans are offered only to members Deposits and loans are offered only to members
Began in Germany in the 19Began in Germany in the 19thth century century Serve low-income individuals and familiesServe low-income individuals and families Came to the U.S. in 1909Came to the U.S. in 1909 Long-run survival stems from their strengthsLong-run survival stems from their strengths
Being able to offer low loan rates Being able to offer low loan rates Being able to offer high deposit rates Being able to offer high deposit rates Having relatively low operating costsHaving relatively low operating costs
15-22
Credit UnionsCredit Unions
Credit unions are organized around a Credit unions are organized around a common affiliation or bond among their common affiliation or bond among their membersmembers Occupation-related bonds are about 2/3 of Occupation-related bonds are about 2/3 of
all U.S. credit unionsall U.S. credit unions Others organized around churches, labor Others organized around churches, labor
unions, or other organizationsunions, or other organizations Common areas of residence have also been Common areas of residence have also been
usedused
15-23
Credit UnionsCredit Unions
In recent years, the restriction of In recent years, the restriction of common bond has been interpreted common bond has been interpreted liberallyliberally Greatly broadened eligible poolGreatly broadened eligible pool Industry has been growingIndustry has been growing Under attack by bankersUnder attack by bankers
Lenient membership rulesLenient membership rules Special tax advantageSpecial tax advantage
Ongoing political battle over the rules Ongoing political battle over the rules for qualifying for the tax advantagefor qualifying for the tax advantage
15-24
Credit UnionsCredit Unions
Size of credit unionsSize of credit unions Fewer, larger credit unionsFewer, larger credit unions Larger credit unions outperform smaller onesLarger credit unions outperform smaller ones Credit union membership has continued to growCredit union membership has continued to grow
U.S. credit unions under intense pressure U.S. credit unions under intense pressure Develop new services Develop new services Penetrate new markets Penetrate new markets Increasing competition from other institutions Increasing competition from other institutions Decline in the demand for their historically most Decline in the demand for their historically most
important service – automobile loansimportant service – automobile loans15-25
Money Market FundsMoney Market Funds
Money market mutual fundMoney market mutual fund is a financial is a financial intermediary pooling savings and investing intermediary pooling savings and investing the monies in money market instruments the monies in money market instruments Appeared in 1972Appeared in 1972 Took advantage of the fact that depository rates Took advantage of the fact that depository rates
were constrainedwere constrained Provided competitive ratesProvided competitive rates Drew money away from depository Drew money away from depository
institutionsinstitutions By year-end 1973 assets were $100 millionBy year-end 1973 assets were $100 million Peaked in 1982 with $200 billion in assetsPeaked in 1982 with $200 billion in assets
15-26
Money Market FundsMoney Market Funds
Money market funds hold high-quality assetsMoney market funds hold high-quality assets The short maturity of the assets The short maturity of the assets Highly liquid security portfolioHighly liquid security portfolio Quickly adjustable to suit market conditionsQuickly adjustable to suit market conditions
They are mostly “no load” fundsThey are mostly “no load” funds There is no commission charge There is no commission charge
Opening an accountOpening an account Purchasing more sharesPurchasing more shares Redeeming sharesRedeeming shares
The accounts can be accessed easily as wellThe accounts can be accessed easily as well
15-27
Money Market FundsMoney Market Funds
An Example of Typical Money Market Fund Information Reported Daily by Security Brokers,
Dealers, and in Daily Newspapers
15-28
Money Market FundsMoney Market Funds
Today, money market funds serve as Today, money market funds serve as Cash-management vehicles where market Cash-management vehicles where market
rates can be earned on funds used for daily rates can be earned on funds used for daily transactionstransactions
Tax-sheltering vehicles (when tax-exempt Tax-sheltering vehicles (when tax-exempt funds are chosen)funds are chosen)
Temporary repository for liquid fundsTemporary repository for liquid funds Safety haven for savingsSafety haven for savings
15-29
Money Market FundsMoney Market Funds
However money market fund share However money market fund share accounts are not government insuredaccounts are not government insured
The differential between their yield and The differential between their yield and yields offered by banks has narrowed yields offered by banks has narrowed in recent yearsin recent years
The money market fund industry has The money market fund industry has recently shown itself to be vulnerable recently shown itself to be vulnerable to low market interest ratesto low market interest rates
15-30
Markets on the NetMarkets on the Net
Answers.com at Answers.com at www.answers.comwww.answers.comAmerican Bank at americanfsb.comAmerican Bank at americanfsb.comAmerican Banker’s Association at American Banker’s Association at
www.aba.comwww.aba.comAmerican Credit Union at americancu.orgAmerican Credit Union at americancu.orgBECU at www.becu.orgBECU at www.becu.orgChicago Post Office Employees Credit Union at Chicago Post Office Employees Credit Union at
my-creditunion.commy-creditunion.comCredit Union National Association at Credit Union National Association at
www.cuna.orgwww.cuna.org
15-31
Markets on the NetMarkets on the Net
Credit Union Times at cutimes.comCredit Union Times at cutimes.comDWS Scudder at www.dws-scudder.comDWS Scudder at www.dws-scudder.comEncyclopedia.com at encyclopedia.comEncyclopedia.com at encyclopedia.comEtrade financial at bankus.etrade.comEtrade financial at bankus.etrade.comFederal Deposit Insurance Corporation Federal Deposit Insurance Corporation
at at www.fdic.govwww.fdic.govFlatbush Federal Savings and Loan Flatbush Federal Savings and Loan
Association at flatbush.comAssociation at flatbush.com
15-32
Markets on the NetMarkets on the Net
Franklin Templeton Investments at Franklin Templeton Investments at www.franklintempleton.comwww.franklintempleton.com
Imoney.net at imoney.netImoney.net at imoney.net IndymacBank at IndymacBank at
www.myindymacbank.comwww.myindymacbank.com ING at ING at www.ing.comwww.ing.com Insurance Information Institute at Insurance Information Institute at
http://www.iii.orghttp://www.iii.org Investment Company Institute at ici.orgInvestment Company Institute at ici.org
15-33
Markets on the NetMarkets on the Net
Money Market Funds at Money Market Funds at www.encyclopedia.comwww.encyclopedia.com
National Credit Union Administration at National Credit Union Administration at www.ncua.govwww.ncua.gov
NuUnion Credit Union at NuUnion Credit Union at www.nuunion.orgwww.nuunion.org
OCTFCU at www.octfcu.orgOCTFCU at www.octfcu.orgOffice of Thrift Supervision at Office of Thrift Supervision at
www.ots.treas.govwww.ots.treas.gov15-34
Markets on the NetMarkets on the Net
Pentagon Federal Credit Union at Pentagon Federal Credit Union at www.penfed.orgwww.penfed.org
Savings and Retail Banking at Savings and Retail Banking at www.savings-banks.comwww.savings-banks.com
The Committee of Scottish Clearing The Committee of Scottish Clearing Bankers at Bankers at www.scotbanks.org.ukwww.scotbanks.org.uk
The NYCB Family of Banks at The NYCB Family of Banks at atlantic-bank-ny.comatlantic-bank-ny.com
15-35
Markets on the NetMarkets on the Net
U.S. Treasury Department at U.S. Treasury Department at www.treasury.gov/press/releases/reportwww.treasury.gov/press/releases/report3070.htm3070.htm
Vanguard MMR Prime Portfolio at Vanguard MMR Prime Portfolio at vanguard.fasttrack.netvanguard.fasttrack.net
Washington Mutual Bank at Washington Mutual Bank at www.wamu.comwww.wamu.com
Wikipedia at Wikipedia at en.wikipedia.orgen.wikipedia.orgWorld Council of Credit Unions at World Council of Credit Unions at
www.woccu.orgwww.woccu.org15-36
Chapter ReviewChapter Review
Introduction to thrift institutionsIntroduction to thrift institutionsSavings and loan associationsSavings and loan associations
Origins of S&LsOrigins of S&Ls How funds are raised and allocatedHow funds are raised and allocated Trends in revenues and costsTrends in revenues and costs Possible ways to strengthen the S&L Possible ways to strengthen the S&L
industry in the futureindustry in the future
15-37
Chapter ReviewChapter Review
Savings banksSavings banks Number and distributionNumber and distribution How funds are raised and allocatedHow funds are raised and allocated Current trends and future problemsCurrent trends and future problems
Credit unionsCredit unions Credit union membershipCredit union membership Size of credit unionsSize of credit unions New services offeredNew services offered A strong competitive forceA strong competitive force
15-38
Chapter ReviewChapter Review
Money market fundsMoney market funds
15-39