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Other Lending Institutions

Other Lending Institutions - Other Lending Institutions...

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Other Lending Institutions: Overview 1. Saving Institutions (thrift)– created to serve needs of individuals, invested in mortgages a. Savings Associations b. Savings Banks – more diversified 2. Credit Unions (thrift) – evolved to meet individual consumer needs, gave consumer loans with member deposits, traditionally created by employers 3. Finance Companies (non-depository) – make loans similar to commercial banks but also have high risk, low credit quality a. Lend to riskier customers & have low rates – much less regulated b. First was created by General Electric to finance appliance sales Savings Associations (S&Ls) In 2010 - 1040 savings institutions - 70% decline Traditionally made long term mortgages to individuals that were fronted by short term deposits, worked while yield curve was upward sloping o Then, fed allowed interest rates to rise and FIs net interest margins became negative net interest margin – interest income minus interest expense/ earning asset Regulation Q ceiling – interest ceiling imposed on small savings and time deposits at banks and thrifts until 1986 Banks can’t offer attractive rates à disintermediation – withdrawal of deposits from depository institutions to be reinvested into money market mutual funds (savings institutions hurt more than banks b/c they didn’t offer checking) o Regulatory forbearance – a policy of the FSLIC not to close economically insolvent FIs, allowing them to continue in operation # of failures continued to grow à FSLIC went bankrupt Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 – thrifts were granted a tax advantage and ability to obtain funds from federal home loan banks if they maintained 65% or more of their loans in mortgage related activities (qualified thrift lender, QTL test) o Discouraged savings institutions from engaging in high risk activities such as junk bonds à prior to test, held 20% in junk bonds Regulators of Savings Institutions Office of Thrift Supervision – bureau of the U.S. Treasury, was established in 1989 under the FIRREA, charters and examines all federal savings institutions and supervises the holding companies of savings institutions Until recently the FDIC managed the savings association fund and bank insurance fund à became DIF (managed by FDIC) State chartered savings institutions – regulated by state agencies Credit Unions Non-profits mutually owned by depositors Cannot serve the general public – only members – traditionally sponsored by employers o Most common form: community based credit union o Must have common bond by: employer, association or locality
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Exempt from anti-trust prohibitions à act cooperatively and pool funds for mutual benefit Credit member deposits = shares à provide loans to other members & earnings from loans are used to pay interest on shares Tend to hold higher levels of equity Can be federally chartered and regulated by NCUA which is primarily a regulatory body
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