Ch 19 - Thrifts: S&Ls, Mutual Savings Banks, Credit...

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A “mutual” bank means that depositors are the owners as well. Credit unions are mutual FIs. Mutual Savings banks were first organized in Scotland. In the US, savings bank were first chartered by the Congress, and the first mutual savings was established in the Northeast in 1816; the idea was to have a “bank” to lend to the poor; instead they fast became a place for the middle class to save their money. Because of the type of ownership, these FIs were conservative; as a result they seldom failed in bad times – they did particularly well during the Depression of the 1930s. But because of the ownership structure, the principal-agent problem becomes more severe: most depositors have small stake in them, resulting in little interest to monitor the management. Also, managers gain little or nothing if the FI does well; at the same time managers lose everything (their jobs) if the FI loses – hence they are unlikely to take much risk at all. (This problem has become less important since the gov now provides deposit insurance). There are now around 350 mutual savings banks, primarily on the east coast. passed legislation creating the S&Ls. Congress decided
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Ch 19 - Thrifts: S&Ls, Mutual Savings Banks, Credit...

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