Savings Associations and Credit Unions Chapter 16 2003

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

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 2

Savings Associations Created to encourage personal thrift by generating returns for depositors ¨ Took two forms: n savings banks n savings and loan associations ¨ 3

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) ¨ 4 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)

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 5

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 1980 s. 6

Savings & Loan vs Savings Banks S&Ls ¨ ¨ 7 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 Savings Banks ¨ ¨ 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

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 8

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 9

The S&L Crisis ¨ High interest rate of 1970 s § 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 1980 s § Changes in regulations compounded problems § Severe financial crisis developed 10 § More than 1, 500 institutions failed or downsized § Industry as whole shrunk considerably § Taxpayers spent billions to bail out industry

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 11

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 ¨ 12 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

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 13

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 14 Trust Corporation (RTC) § Created by FIRREA in 1989 § Dispose of properties of failed S&Ls

Credit Unions ¨ 15 Cooperative, nonprofit, memberowned, tax-exempt depository institutions operated for the benefit of member savers and borrowers who share common bond.

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 16

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 17

Credit Unions ¨ National (NCUA) Credit Union Association § 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 18

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 19

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 20 Certificates § Credit union equivalent of a CD

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 ¨ 21 Liquidity risk or illiquid financial position § Dealt with by accessing funds through the Central Liquidity Facility (CLF)