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THRIFT INSTITUTIONS AND FINANCE COMPANIES CHAPTER OBJECTIVES 1. This chapter describes those depository financial institutions which are not commercial banks. They are known collectively as “thrift institutions” and include savings associations (traditionally called savings and loan associations or S&Ls), savings banks, and credit unions. 2. The chapter also describes the various types of finance companies, nondepository lending institutions which are funded and regulated quite differently from depository institutions. 3. The chapter summarizes similarities and differences among these various types of nonbank lending institutions in terms of— Historical origins and purposes; Balance sheet and operational structure; Key management issues; Unique terminology; and Regulation. CHANGES FROM THE LAST EDITION Tables and exhibits have been updated. CHAPTER KEY POINTS 1. Savings banks and savings and loan associations originated in “mutual” (depositor- owned) form to pool savings and make loans among ordinary individuals overlooked or disregarded by the financial establishment of the era (particularly commercial banks). Credit unions, which remain exclusively mutual in form, united small savers and borrowers with a "common bond" of occupation, association, or residence. Compared to commercial banks, all these nonbank depository institutions rely more on savings and time deposits. Savings institutions focus more of their lending on home mortgages; credit unions concentrate more on small consumer loans. Finance companies are simply firms in the business of lending money who do not have depositors. They have existed for many years in many different forms, and provide many different types of credit. 2. Federal tax laws historically promoted a “franchise” in mortgage lending for savings associations and savings banks. They are still among the key providers of home loans. Since deregulation in the early 1980s, however, they have been free to compete more or less directly with commercial banks on both sides of the balance sheet—loans and deposits. They traditionally assumed considerable interest rate risk, using relatively short-term, fixed-rate time and savings deposits to fund relatively long-term, fixed-rate mortgage loans. They suffered major losses in the late 1970s and early 1980s as sharply rising interest rates caught them in a negative maturity GAP with loan portfolios too reliant on collateral value over other sources of repayment. Today their lending practices are much more proactively monitored by regulators, their funding sources are much more diversified, and they commonly sell or securitize mortgage loans into secondary markets to maintain liquidity, diversify their loan portfolios, and manage interest rate risk. 245
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This note was uploaded on 02/23/2011 for the course FINA 4090 taught by Professor S during the Spring '11 term at Toledo.

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