What it means
Thrift banks grew up in the nineteenth century as community institutions that let working families save safely and borrow to buy a home. Many began as mutual organisations, which means they were owned by their depositors and not by outside shareholders.
Over time, a large number converted to shareholder ownership. Their balance sheet is simple to describe.
On one side are customer deposits, which are mostly short term, and on the other are home loans, which are mostly long term and often at fixed rates. The profit comes from the gap between the interest earned on the loans and the interest paid on the deposits.
That gap is measured by net interest margin, and it is the central number in a thrift bank's accounts. Because the bank borrows short and lends long, it is exposed to interest rate risk.
When deposit rates rise faster than loan rates, the margin shrinks, and a prolonged squeeze can threaten survival. Thrift banks are supervised by banking regulators, must hold minimum levels of capital and usually offer deposit insurance up to a legal limit.
Their activities were historically restricted to housing finance, but many now offer current accounts, cards and small business loans. The differences from commercial banks have narrowed, though the home loan focus often remains.
For an outside manager, a thrift bank is a useful counterparty for mortgages and savings, and an example of how a simple business model can be sensitive to interest rates. When reading its accounts, the key items to check are the net interest margin, the capital ratio, the share of loans that are overdue and the mix between fixed and floating rate lending.
In practice
Real-world examples.
Example
A couple saves for five years in a savings account at a local thrift bank. When they are ready to buy, the bank offers them a mortgage and already knows their savings record. The loan is approved quickly because the relationship is established.
Example
A regional thrift bank reviews its funding after a rise in short-term interest rates. It offers a higher rate on one-year deposit certificates to lock in funding for longer. The treasury team calculates the effect on net interest margin before launching the product.
Example
A large bank buys a thrift bank to gain its branches and its stable deposit base. The buyer pays a price based on the bank's equity and the quality of its loans. After the merger, the thrift's mortgage business is integrated into the larger group.
Formula
Calculation
Net interest margin (%) = (Interest income - Interest expense) / Average earning assets x 100
Suppose a thrift bank has average earning assets of $500,000,000. It earns $25,000,000 of interest on its mortgages and securities and pays $15,000,000 of interest on deposits and borrowings. The net interest income is 25,000,000 - 15,000,000 = $10,000,000. The margin is 10,000,000 / 500,000,000 x 100 = 2.0%. If deposit costs rose by $4,000,000 with no change in income, net interest income would fall to $6,000,000 and the margin to 6,000,000 / 500,000,000 x 100 = 1.2%.Case study
Seen in the real world.
Cedar Valley Savings is an illustrative, fictional thrift bank with $800,000,000 of assets, mostly 30-year fixed-rate home loans. For years its margin was comfortable at about 2.5%, and the board paid little attention to funding costs.
When short-term interest rates climbed, depositors moved money into higher-paying accounts, and Cedar Valley had to raise its deposit rates. Within a year, its margin fell to 1.6%, which on average earning assets of $760,000,000 meant a reduction in annual net interest income of about $6,840,000.
In this illustrative story, the new chief financial officer brought in a monthly gap report that compared the timing of assets and liabilities. The bank began selling a share of new fixed-rate loans to investors and introduced adjustable-rate mortgages, which reduced its sensitivity to future rate rises.
Watch out
Common mistakes.
- Assuming a thrift bank is a different kind of institution from a savings bank, when the labels overlap and are often used interchangeably.
- Judging its health by size alone, when the margin, capital and loan quality tell you far more.
- Forgetting that the bank is exposed to a mismatch between short-term deposits and long-term loans.
Questions
People also ask.
How does a thrift bank make money?
Mainly from the difference between the interest it charges on loans and the interest it pays on deposits, plus fees from services.
Are deposits protected?
In most countries, deposits are insured up to a limit set by law, but the limit and the rules differ by country and should be checked.
How is it different from a commercial bank?
A thrift bank focuses on household savings and home loans, while a commercial bank has a broader mix of business lending and services.
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