What Is Savings and Loan?
A savings and loan association (S&L) is a type of financial institution that traditionally specializes in accepting savings deposits and providing funds primarily for mortgage lending and other housing-related activities. These institutions fall under the broader category of financial institutions, serving as intermediaries between savers and borrowers. Historically, savings and loan associations focused on promoting homeownership by offering long-term, fixed-rate residential mortgages, funded by the short-term deposits of their members. They differ from commercial banks in their historical emphasis and regulatory framework, though many distinctions have blurred over time. Savings and loan associations play a crucial role in providing liquidity to the housing market and facilitating individual savings through various deposit accounts.
History and Origin
The origins of savings and loan associations can be traced back to the building societies of Great Britain in the late 1700s. These were cooperative groups of workmen who pooled their funds to finance the construction of their homes, eventually disbanding once all members had housing. The concept evolved, leading to permanent institutions that accepted deposits from individuals who were not necessarily seeking home loans themselves. In the United States, the first savings and loan association, the Oxford Provident Building Association, was established in Philadelphia in 18315. By the end of the 19th century, these institutions had spread across all states and territories, becoming integral to local communities. During the Great Depression, the U.S. government established the Federal Home Loan Bank System in 1932 to provide a reserve credit system, supporting institutions specializing in home financing. The role of savings and loan associations grew significantly after World War II, fueled by increasing demand for homeownership and government support.
Key Takeaways
- Savings and loan associations traditionally focused on residential mortgage lending and accepting consumer deposits.
- They were historically structured as mutual organizations, owned by their depositors and borrowers.
- The industry underwent significant deregulation in the 1980s, which contributed to a major financial crisis.
- Regulatory changes led to the consolidation and diversification of many savings and loan associations, blurring their distinction from commercial banks.
- Deposit insurance mechanisms were put in place to protect savers in the event of institutional failure.
Interpreting the Savings and Loan
Understanding savings and loan associations involves recognizing their dual role: as a repository for individual savings and as a primary source of funds for residential real estate. For individuals, an S&L functions as a place to keep savings, often offering competitive interest rates on accounts like certificates of deposit (CDs) and savings accounts. From a broader economic perspective, the health and activity of savings and loan associations can indicate the vitality of the housing market and consumer financial well-being. Their balance sheets provide insights into local and national housing trends, as well as the overall financial stability of the banking sector. Regulatory bodies monitor their asset-liability management to prevent imbalances that could lead to systemic risk.
Hypothetical Example
Consider Jane, who is looking to buy her first home. She approaches "Community Savings & Loan" for a mortgage. Community Savings & Loan, a local savings and loan association, offers her a 30-year fixed-rate mortgage. The funds for Jane's mortgage come from the deposits held by the institution, which include savings accounts and term deposits from other local residents. By lending to Jane, the savings and loan facilitates her home purchase, while the monthly mortgage payments she makes contribute to the S&L's revenue, allowing it to pay interest to its depositors and fund new loans. This exemplifies the traditional intermediary function of a savings and loan in a local economy.
Practical Applications
Savings and loan associations have historically been cornerstones of community finance, primarily facilitating homeownership. Their core practical application lies in originating and servicing residential mortgage loans, making them essential players in the real estate market. They also provide various savings products, acting as a safe haven for consumer deposits. While their direct lending to individuals for housing remains a key function, many have expanded their services.
Moreover, savings and loan associations interact with larger financial systems. They can access funds from the Federal Home Loan Bank System, a government-sponsored enterprise that provides liquidity to its member financial institutions to support housing finance and community investment4. This connection helps ensure that even smaller savings and loan associations have access to funding to meet local demand for mortgages and other loans, contributing to broader housing and economic development efforts. They are also subject to specific regulatory oversight to ensure compliance and financial soundness.
Limitations and Criticisms
Despite their vital role, savings and loan associations faced significant challenges, particularly in the late 20th century. Their traditional business model of taking short-term deposits and issuing long-term, fixed-rate mortgages made them highly vulnerable to shifts in interest rates. When interest rates rose sharply in the late 1970s and early 1980s, S&Ls were often paying more for deposits than they earned on their existing mortgage portfolios, leading to widespread losses.
Deregulation efforts, such as the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), aimed to grant S&Ls more flexibility, allowing them to offer a wider range of services and make riskier investments3. However, this deregulation, coupled with inadequate risk management and, in some cases, fraudulent practices, contributed to the catastrophic savings and loan crisis of the 1980s. Hundreds of institutions failed, costing taxpayers billions of dollars2. This crisis highlighted the importance of robust deposit insurance and stringent regulation to prevent excessive risk-taking and protect the financial system from significant economic downturns. The crisis led to the establishment of the Resolution Trust Corporation (RTC) to manage and dispose of the assets of failed S&Ls, a massive undertaking that sought to minimize impact on real estate and financial markets1.
Savings and Loan vs. Commercial Bank
The primary distinction between a savings and loan association and a commercial bank traditionally lay in their core business focus and regulatory structure. Savings and loan associations historically specialized in residential mortgage lending and accepting deposits from individuals, often operating as mutual organizations. Their mission was largely centered around promoting homeownership and community savings.
Commercial banks, on the other hand, have a broader scope. While they also accept deposits and make loans, their lending activities extend significantly into commercial lending to businesses, offering a wider array of financial services such as checking accounts, lines of credit, and investment banking services. Regulatory frameworks for the two types of institutions also differed historically, although various legislative acts throughout the late 20th century have blurred these lines, allowing both types of institutions to offer increasingly similar products and services. Today, many institutions that were once solely savings and loan associations operate much like commercial banks due to consolidation and deregulation.
FAQs
What is the main purpose of a savings and loan association?
The main purpose of a savings and loan association is to serve as a financial intermediary, primarily by accepting deposits from individuals and using those funds to provide residential mortgages for home purchases. This focus helps support homeownership within communities.
How are savings and loan associations regulated?
Savings and loan associations are regulated by federal and state agencies, similar to other depository institutions. Historically, they were overseen by specific thrift regulators, but after the savings and loan crisis, much of their oversight and deposit insurance responsibilities were consolidated under the Federal Deposit Insurance Corporation (FDIC).
Are savings and loan associations still common today?
While many institutions that started as savings and loan associations still exist, the traditional distinctions between them and commercial banks have largely faded due to deregulation and industry consolidation. Many have broadened their services and may now operate as full-service banks. However, their historical legacy and focus on mortgage finance remain important.
What happened during the savings and loan crisis?
The savings and loan crisis of the 1980s was a major financial upheaval caused by rising interest rates, deregulation that allowed risky investments, and, in some cases, mismanagement and fraud. Hundreds of savings and loan associations failed, leading to a significant government bailout and the creation of the Resolution Trust Corporation to manage the crisis.