Aleiana Torres

11/19/19

Chapter 14 Homework (1,2,4, 6,8, 13,19,21,23,25,27,28)

1.) How do balance sheets of savings institutions differ from those of commercial banks? How do
their sizes compare?

Savings institutions are specialized institutions that make long-term residential mortgage loans, usually
funded with the short-term deposits of small savers. The industry is now significantly smaller in terms of
both numbers and asset size. Specifically, the number of savings institutions decreased from 3,677 to
2,262 from 1989 to 1993 and assets also continued to decrease. In 2010 there were only 1,154 savings
institutions left.

2.) What were the reasons for the crisis of the savings institutions industry in the late 1970s and
early 1980s?

The Fed’s restrictive monetary policy actions led to a sudden and dramatic surge in interest rates and
many SI’s faced negative interest spreads or net interest margins in funding much of their long maturity,
fixed-rate residential mortgages in their portfolios. Also, due to the Regulation Q ceilings, many small
depositors, especially the more sophisticated, withdrew their funds from savings institution deposit
accounts and invested directly in unregulated money market mutual funds accounts. Many SI’s also
failed when the junk bond market collapsed. Furthermore, the economic downturns in the mid-1980s
forced many borrowers with mortgage loans issued by SI’s to default. In short, the risk incurred by many
of these institutions did not pay off.

4.) What are the main assets and liabilities held by savings institutions?

Assets: mortgages, mortgage-backed securities, cash and investment securities (U.S. Treasury securities
and federal agency obligations; fed funds and repos; and bonds, notes debentures, and other securities)

Liabilities: Transaction accounts, small time and savings deposits

6) What does it mean when a savings institution is a mutual organization?

Mutual organization: an institution in which the liability holders are also the owners—for example, in a
mutual savings bank, depositors also own the bank.
8.) How do credit unions differ from savings institutions?

Savings institutions: specialized institutions that make long-term residential mortgage loans, usually
funded with the short-term deposits of small savers; depository institutions; many fail (lack of
diversification)

Credit unions: not-for-profit deposit institutions mutually organized and owned by their members
(depositors); prohibited from serving the general public; not taxed; can collectively pool funds; less
affected by the financial crisis of the 1980s; tend to hold large amounts of government securities as
assets; many converted to common charter (state or fed??) to expand their customer base

13. What are the main assets and liabilities held by credit unions?

Slide 12-15

19.) What are the three types of finance companies and how do they differ from commercial banks?

The three types of finance companies are (1) sales finance institutions, (2) personal credit institutions,
and (3) business credit institutions

Sales finance institutions: finance companies specializing in loans to customers of a particular retailer or
manufacturer

Personal credit institutions: finance companies specializing in installment and other loans to consumers

Business credit institutions: finance companies specializing in business loans

Captive finance company: a finance company wholly owned by a parent corporation

21.) What are the major assets and liabilities held by finance companies?

Assets: Business and consumer loans; accounts receivable (consumer, business and real estate)

Liabilities: bank loans; commercial paper; debt due to parent; debt not elsewhere classified; capital,
surplus and undivided profits

25.) Why are finance companies less regulated than commercial banks?
Because finance companies do not accept deposits, they are not subject to the extensive oversight by
federal and state regulators as are banks or thrifts—even though they offer services that compete
directly with those of depository institutions. The lack of regulatory oversight for these companies
enables them to offer a wide scope of “bank like” services and yet avoid the expense of regulatory
compliance and the same “net regulatory burden” imposed on banks and thrifts.

27.) What is a wholesale motor vehicle loan?

Motor vehicle loans consist of retail loans that assist in transactions between the retail seller of the good
and the ultimate consumer. Wholesale loans are loan agreements between parties other than the
companies’ consumers.

28.) What signal does a low debt-to-assets ratio for a finance company send to capital markets?

Debt to total assets = total debt / total assets

The lower the debt-to-asset ratio, the less debt and more equity the applicant uses to finance its assets.

When a company has more debt than equity, yellow flags fly, but industry comparisons are important.
Economic value achieved should exceed the cost and risk incurred with the debt. Solvency measures
probably deliver a stronger signal for what not to buy than what to buy.