Answers to Chapter 14 Questions
A comparison of Table 11-2 with Table 14-3 reveals that unlike banks, savings institutions
hold the vast majority of their assets in the form of mortgages and mortgage backed securities.
Like banks, the liabilities of savings institutions consist primarily of demand and time deposits.
The assets of commercial banks are more diversified than those of savings institutions.
Although there is a wide dispersion of sizes for commercial banks, we can see from
Figure 11-8 that in 2004 there were 7,769 banks with assets of $7,602.5 billion, giving us an
average size of $979 million. From Table 14-5, we see there were 1,365 savings institutions with
assets totaling $1,632.6 billion giving us an average of $1,196 million. Surprisingly, the average
bank size is smaller than the average savings institution. This speaks to the large number of
relatively small banks reported in Table 11-5. If we separate the savings associations from the
savings banks, their sizes are $1,047 million and $1,500 million respectively, in 2004.
2. The original mandate of the thrift industry was to pool small deposits from individuals and
households in order to finance mortgage lending. Residential home ownership was deemed to be
socially desirable and therefore this sector of the financial services industry received a franchise
to encourage mortgage financing. This franchise became less valuable with the growth of the
securitized mortgage market. Thus, the value of the intermediation function performed by thrifts
(funneling small savings into home mortgage lending) was eroded by competition.
At the same time, the Federal Reserve changed its conduct of monetary policy, allowing
interest rates to rise significantly and become much more volatile. This change in policy had the
worst possible impact on thrifts with their portfolios of long-term, fixed- rate mortgages. The
interest rate increases caused the market value of the thrifts' mortgage portfolios to decline,
thereby rendering many of the thrifts insolvent. Since the value of the thrift franchise already had
been eroded, thrifts had very little to lose when they received expanded lending powers in 1980
and 1982. They took wild gambles on risky undertakings with the realization that they were
betting with taxpayers' money. The only thing that the thrift owners really had to lose was the
thrift charter. Many savings institutions failed as a result of these risky investments.
The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980
sought to allow thrifts to compete with nondepository FIs by offering market rates of interest on
deposits. This was accomplished via a lifting of the Regulation Q ceilings on deposit interest rates
over the period from 1980 until 1986. Furthermore, to make thrift and bank deposits more
attractive to the public, the ceiling on deposit insurance coverage was lifted from $40,000 to
The Garn-St. Germain Depository Institutions Act of 1982 (DIA) further expanded the