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Types of Institutions in the U.S. Banking System – Savings and Loan Associations

This is the second in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. This second article covers savings and loan associations. The first article covered credit unions. Future articles will cover several types of banks.

When you think of a savings and loan, maybe you think of the Bailey Savings & Loan from the movie It’s a Wonderful Life or remember the savings and loan crisis of the 1980s, when more than 1,000 savings and loans with over $500 billion in assets failed.

But there’s much more to the story. Savings and loan associations originally specialized in home-financing, be it a mortgage, home improvements or construction. According to Encyclopedia Britannica, Savings and loan associations originated with the building societies of Great Britain in the late 1700s. They consisted of groups of workmen who financed the building of their homes by paying fixed sums of money at regular intervals to the societies. When all members had homes, the societies disbanded. The societies began to borrow money from people who did not want to buy homes themselves and became permanent institutions. Building societies spread from Great Britain to other European countries and the United States. They are also found in parts of Central and South America. The Oxford Provident Building Association of Philadelphia, which began operating in 1831 with 40 members, was the first savings and loan association in the United States. By 1890 they had spread to all states and territories.

Today, explains, David Bakke, a financial columnist for MoneyCrashers.com, explains how S&Ls have evolved. "More recently, they have also expanded into areas such as car loans, commercial loans and even mutual fund investing. Currently, there isn’t much difference between them and other types of financial institutions."

S&Ls are a type of thrift institution. Like all financial institutions they are bound to rules and regulations. They can have a state or federal charter. Those with a federal charter are regulated by the Office of the Comptroller of the Currency (OCC). The Office of Thrift Supervision (OTS) used to be the regulator before it was merged with the OCC in 2011.

your deposits at S&Ls today are insured by the FDIC

Another big change that impacted S&Ls was the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). It abolished the Federal Savings and Loan Insurance Corporation, which had provided deposit insurance to savings and loans since 1934. It created two insurance funds, the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF), which were both administered by the FDIC. Those two funds were merged into the Deposit Insurance Fund (DIF) in 2006. In summary, your deposits at S&Ls today are insured by the FDIC.

If you’re wondering how S&Ls work, to put it simply, the money you deposit into your savings account, is used to fund the money the S&L doles out in loans.

Savings and loans have some advantages over other types of institutions. "Many S&Ls keep many of the loans that they originate in their own portfolio instead of selling them off for securitization.  This means that they often have more flexibility in their underwriting criteria than do those lenders that sell off their mortgages to Fannie, Freddie and Wall Street securitizers.  This means that borrowers with atypical profiles or borrowers interested in atypical properties might be more likely to find a lender open to a nontraditional deal in the S&L sector," says David Reiss, a professor at Brooklyn Law School, that specializes in real estate.

Because many S&Ls are member driven and more connected to the community, they are much more like credit unions than big retail banks. As you know from the first article in this series, credit unions offer some distinct benefits. You probably will get better interest rates, since the philosophy is the member comes first, profits second. Then too, because you’re dealing with a smaller organization, instead of large retail bank, there is a certain familiarity, more of a sense of family as portrayed in It’s a Wonderful Life at the Bailey Bank, though certainly not the greedy and heartless Mr. Potter’s bank. That means you might have a better chance of getting money when you need it because you’re not some stranger walking in off the streets, but the people that need to know you, probably do, or someone on the staff can put in a word on your behalf.

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Anonymous   |     |   Comment #1
There are to many agencies and regulations  to make any S&L profitable. There so many charters, paragraphs,  sections, of the banking system that just to comply with SEC they have to pay auditing agency full time employment and at a cost of millions per year. Furthermore, FDIC requires weekly statements and insurance payments on daily balances and therefore no money left to pay any interest on the savers.
The banking system will collapse on its own weight of regulations, costs and interference from outside, like in a communist system. The banks today have lost the allure of the savers and the cheap money from the FED will stop very soon to detriment of all financial system.
Anonymous   |     |   Comment #3
" the cheap money from the FED will stop very soon to detriment of all financial system."
I very much doubt that.
jimbeau   |     |   Comment #2
The S&L industry was destroyed in the 1980's due to the spread between the low interest rates that were being charged on older long-term residential loans and the higher rates that were being paid to attract short-term depository accounts.    In a futile attempt to keep them afloat, the government deregulated S&Ls so that they could branch-out into other types of short-term loans that would carry  interest rates higher that those that were being paid on the depository accounts.   The hope was that this would allow the S&L's to cover the residential loan losses with the profits from these inherently riskier loans.   The only reason that the government did this was because the FSLIC couldn't cover the cost of S&L's being allowed to fail.   When this didn't work, it required a taxpayer bailout to back the depository accounts at the failed S&L's.  So, despite what "Anonymous" would have you believe, deregulation is not a magic bullet for solving all of the problems of the financial system.    In fact, it should be pretty obvious by now that deregulation and not enforcing regulations already in place were major factors in causing the current financial crises.   
Anonymous   |     |   Comment #4
why banks the size of American Express Bank, Synchrony Bank are Savings and Loan Banks? 
#5 - This comment has been removed for violating our comment policy.

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