What it means
Savings and loan associations began as local societies where members pooled savings to lend to one another for home purchases. Congress created a federal charter in the 1930s, so that the institutions could operate under national rules and be supervised by the federal government.
Their deposits were later covered by federal deposit insurance. The business model is simple.
A savings and loan collects deposits, which are short-term, and lends the money out as long-term mortgages, which are fixed for many years. It earns the difference between the interest charged on loans and the interest paid on deposits.
That model carries a built-in risk. If interest rates rise, the institution must pay more to keep its deposits, but its old mortgages still earn the lower rate.
In the late 1970s and early 1980s this squeeze, combined with weak oversight and risky lending, caused hundreds of institutions to fail and led to major legal reforms. Regulation changed after the crisis.
Federal savings associations are now supervised by the Office of the Comptroller of the Currency, which took over from a separate thrift regulator that was abolished under the Dodd-Frank Act. They must hold a large share of their assets in housing-related loans to keep their special status, though the rules have loosened over the years.
For a finance professional, the key lesson is the risk of borrowing short and lending long. Today the differences between thrifts and commercial banks have narrowed, but the focus on home lending remains.
Anyone analysing a thrift looks closely at its interest rate risk, its capital and the quality of its mortgage book. Members of the public most often meet a thrift through a local branch that offers savings accounts, home loans and sometimes small business or consumer lending.
The ownership can be a mutual form, owned by its depositors, or a stock form, owned by shareholders. That ownership choice affects how it raises capital and how it treats its customers.
In practice
Real-world examples.
Example
A family opens a savings account at a federal savings and loan and later takes a 30-year fixed mortgage for $240,000 from the same institution. The institution funds the loan from its deposit base. The family appreciates the local decision-making on the application. When rates change, the loan officer explains the options for refinancing in plain terms.
Example
A regional investor considers buying shares in a thrift holding company. The analyst compares its net interest margin of 2.4% with a commercial bank peer at 3.4%. She asks whether the lower margin is offset by low operating costs. The answer shapes whether she values the thrift at a discount or at a premium to its peer.
Example
A treasury manager at a savings institution sees that deposit rates are rising faster than mortgage yields. He models the effect of a 1 percentage point rise in funding costs on $100,000,000 of fixed-rate loans, which is $1,000,000 a year of lost margin. He recommends shortening the asset maturities.
Formula
Calculation
Net interest margin = (interest income - interest expense) / average earning assets
Suppose a federal savings and loan has $150,000,000 of average earning assets, mostly mortgages. It earns $9,000,000 of interest income and pays $5,400,000 of interest to depositors and lenders. Net interest income = 9,000,000 - 5,400,000 = $3,600,000. Net interest margin = 3,600,000 / 150,000,000 = 0.024, or 2.4%.Case study
Seen in the real world.
Hillcrest Federal Savings is an illustrative, fictional thrift with $400,000,000 of assets, of which 80% are 30-year fixed-rate mortgages. A rapid rise in market interest rates starts to push up its deposit costs.
The finance director calculates that every 1 percentage point rise in the cost of $320,000,000 of rate-sensitive funding costs the institution $3,200,000 a year, while the mortgage income stays fixed. She presents the exposure to the board.
The board agrees to sell some of the fixed-rate loans, begin offering adjustable-rate mortgages and borrow longer-term funds from a regional home loan bank. In this illustrative case, the steps reduce the exposure to about half within a year, and the lesson is that mismatched maturities are the central risk of the thrift model.
Watch out
Common mistakes.
- Treating a savings and loan as identical to a commercial bank, when its focus is on residential mortgages.
- Assuming all savings and loans failed in the 1980s, when many survived and the industry was reformed.
- Ignoring interest rate risk when analysing a thrift, even though the model borrows short and lends long.
Questions
People also ask.
Who regulates federal savings associations?
The Office of the Comptroller of the Currency supervises them, and deposits are insured by the federal deposit insurance fund.
What is a thrift?
It is another name for a savings institution that focuses on household saving and mortgage lending.
What caused the savings and loan crisis?
A mismatch between short-term funding and long-term fixed-rate mortgages, combined with rising rates, weak oversight and risky lending.
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