FINANCE - Chapter 17 Thrift Institutions and Finance...

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Chapter 17 Thrift Institutions and Finance Companies
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Thrift Institutions 1. Savings and Loan Associations (SA) 2. Savings Banks (SB) 3. Credit Unions (CU) SA and SB focus on home ownership SA – started as building association; individuals make deposits (like a club); people in association can borrow and buy a house (repaying over time); when everyone had a house, association dissolved
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SB – started out as mutual savings banks, owned by depositors Historically, advantages were giving to SA’s and SB’s by the government OWNING YOUR OWN HOME – considered a desirable social goal by government Thrift crisis in 1980’s changed the attitude of the government somewhat
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SA and SB Balance Sheets Assets High percentage in mortgages and mortgage-related assets Primarily 1-4 family residential primarily Growth in holdings of mortgage backed securities Also going into consumer and commercial lending
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Liabilities 1. Time and Savings Deposits – majority of funds; very high percentage for small institutions; with deregulation in 1980’s, can offer checking accounts and money market deposit accounts 2. Borrowed Funds- Federal Home Loan Bank Advances – provides longer term borrowing at favorable rates
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Capital Higher percentage of equity since 1980’s Corporate forms 1. Mutuals – owned by depositors; net worth in “reserves and surplus”; very small in size but larger in numbers; cannot grow easily since can’t issue stock to raise capital 2. Stock Form - owned by stockholders; many mutuals converted to stock in 1980’s
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Savings Institution Profitability Traditionally very interest rate sensitive Large negative maturity gap; long term fixed rate mortgages funded by variable rate deposits; hurt if interest rates rise In the last 15 years, MGAP has become less negative due to more variable rate mortgages, longer term funding Also overall declining interest rates ROA around 1%; ROE around 14%
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FINANCE - Chapter 17 Thrift Institutions and Finance...

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