Chapter 15

Nonbank Thrift Institutions:

Savings & Loans, Savings Banks,
Credit Unions, and Money Market
Funds
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 Learning Objectives 

• To see the significant roles that thrift institutions play in the

functioning of a modern economy and financial system.
• To learn about the types of services that thrift institutions offer
to the public and who their principal competitors are.
• To understand the principal similarities and differences among
the major types of thrift institutions.

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Introduction

• Nonbank financial institutions play a vital role in the flow of

money and credit within the financial system, especially the
home mortgage market and the market for personal savings.
• Recently however, both bank and nonbank financial institutions
are “converging” in terms of the services they offer and the
markets they serve.

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Savings and Loan Associations

• Savings and loan associations (S&Ls) are among the largest of

all thrift institutions, accepting deposits and extending loans
and other services primarily to household customers.
• S&Ls emphasize longer-term loans, especially mortgage loans.

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Savings and Loan Associations

• S&Ls began essentially as a single-product industry in the early

19th century, accepting savings deposits from middle-income
individuals and families and lending those funds to home
buyers.
• Later, competition from other financial institutions,
deregulation, and many failures, forced S&Ls to diversify their
operations and aggressively solicit new customers.

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Savings and Loan Associations

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Savings and Loan Associations

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Savings and Loan Associations

• The size of the savings industry peaked in 1988, when total

financial assets reached $1,640 billion.
• The sharp decline that followed was the result of large numbers
of failures and the conversion of some S&Ls into other kinds of
financial institutions, most notably commercial banks and
savings banks.

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Savings and Loan Associations

• One primary cause for the low profitability of S&Ls during the
1980s and 1990s was that many S&L assets (fixed-rate
mortgage loans) were interest-rate insensitive while most of
their liabilities (deposits) were highly sensitive to interest rates.
• So, during periods of rapidly rising market interest rates, the
industry’s net interest margin were often severely squeezed.

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Savings and Loan Associations

• S&Ls need
- sound diversification decisions,
- carefully managed loan portfolios,
- risk management, and
- further relaxation of government regulations.
• Today, more aggressive S&Ls are branching out in at least
three different directions – real estate models, family financial
centers, and diversified models.

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Savings Banks

• Savings banks began in Scotland in the early 19th century, and

then took root in the U.S. about 150 years ago to meet the needs
of the small saver.
• Like S&Ls, they play an active role in the residential mortgage
market. However, they are more diversified in their
investments, purchasing corporate bonds and common stock,
making consumer loans, and investing in commercial
mortgages.

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Savings Banks

• The number of savings banks operating today is small – at most

a few hundreds.
• They are scattered throughout the United States. Massachusetts
leads the list, followed by New York.
• The distinction among S&Ls, savings banks, and commercial
banks is becoming blurred, especially because they are readily
convertible from one form to another.

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Savings Banks

• The savings bank industry faces a number of problems that will

significantly affect its future as a conduit for savings and
investment.
• In particular, savings banks have inflexible asset structures and
face competition from other financial institutions.
• Their future growth depends on their ability to gain the
necessary changes in government regulations to allow them to
respond to changing financial market conditions.

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Credit Unions

• Credit unions are cooperative, self-help associations of

individuals, and savings deposits and loans are offered only to
members of each association.
• Credit unions came to the U.S. in 1909, and their long-run
survival stems mainly from their being able to offer low loan
rates and high deposit interest rates and from their relatively
low operating costs.

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Credit Unions

• Credit unions are organized around a common affiliation or

bond among their members. Most members work for the same
employer, or for one of a group of related employers.
• There is a strong shift today toward fewer, but larger, credit
unions. The decline is due primarily to mergers, failures, and a
structural shift in the U.S. economy from manufacturing
industries toward more service industries.

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Credit Union Statistics

Source: Credit Union National Association, Credit Union Report 2002,

McGraw-Hill/Irwin World Council of Credit Unions, Inc., 2002 Statistical Report;
Money and Capitaland Board9/eof Governors of the Federal Reserve
Markets, © 2006 System, Flow of Companies,
The McGraw-Hill Funds Accounts.
Inc., All Rights Reserved.
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Credit Unions

• U.S. credit unions are under intense pressure to develop new

services and penetrate new markets due to increasing
competition from other financial institutions and a decline in
the demand for their historically most important credit service –
automobile loans.
• However, the industry has repeatedly shown its capacity for
service innovation and its ability to compete successfully for
both consumer loans and savings accounts.

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Credit Unions

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Money Market Funds

• In 1972, the first money market mutual fund – a financial

intermediary pooling the savings of individuals and businesses
and investing those monies in short-term, high-quality money
market instruments – opened for business.
• The fund offered share accounts whose yields reflect prevailing
money market rates. In contrast, the interest rates on most bank
deposits were then restrained by government regulation.

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Money Market Funds

Money Market Funds:

Assets Held and Total Shares Outstanding, 1980–2004* ($ Billions)

Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts;
Financial Assets and Liabilities, selected issues.
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Money Market Funds

• On the whole, money market funds hold high-quality assets.

The short maturity of the assets results in a highly liquid
security portfolio that can be adjusted quickly to suit changing
market conditions.
• They are mostly “no load” funds – there is no commission
charge for opening an account, purchasing more shares, or
redeeming shares. The accounts can be accessed easily too.

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Money Market Funds

An Example of Typical Money Market Fund Information Reported

Daily by Security Brokers, Dealers, and in Daily Newspapers

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Money Market Funds

• Today, money market funds serve as

- cash-management vehicles where market rates can be earned on
funds used for daily transactions;
- tax-sheltering vehicles (when tax-exempt funds are chosen);
- a temporary repository for liquid funds; and
- a safety haven for savings.

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Money Market Funds

• However, note that money market fund share accounts are not
government insured.
• The differential between the yield on the accounts and the rate
of return on money market deposits at banks has also
narrowed in recent years.
• The money market fund industry has recently shown itself to
be vulnerable to low market interest rates too.

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Markets on the Net

• Credit Union National Association at www.cuna.org

• Federal Deposit Insurance Corporation at www.fdic.gov
• Investment Company Institute at http://www.iii.org
• Money Market Funds at www.encyclopedia.com

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Markets on the Net

• National Credit Union Administration at www.ncua.gov

• Office of Thrift Supervision at www.ots.treas.gov
• Savings and Loan Industry at www.encyclopedia.com
• U.S. Treasury Department at
www.treasury.gov/press/releases/report3070.htm

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Markets on the Net

• World Council of Credit Unions at www.woccu.org

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Chapter Review

• Introduction to Thrift Institutions

• Savings and Loan Associations
- Origins of S&Ls
- How Funds Are Raised and Allocated
- Trends in Revenues and Costs
- Possible Ways to Strengthen the S&L Industry in the Future

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Chapter Review

• Savings Banks
- Number and Distribution
- How Funds Are Raised and Allocated
- Current Trends and Future Problems
• Credit Unions
- Credit Union Membership
- Size of Credit Unions
- New Services Offered
- A Strong Competitive Force

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Chapter Review

• Money Market Funds

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