Savings and loan association
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A savings and loan association is a financial institution which specializes in accepting savings deposits and making mortgage loans. They are often mutually held, meaning that the depositors and borrowers are members with voting rights and have the ability to direct the financial and managerial goals of the organization. It is possible for a savings and loan to be stock-based and even publicly traded. This means, however, that it truly no longer is an association and depositors and borrowers no longer have any managerial control.
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Early history of the savings and loan association
At the beginning of the 19th century, banking was still something only done by those that had assets or wealth that needed safekeeping. The first savings bank in the United States, the Philadelphia Savings Fund Society, was established on December 20, 1816, and by the 1830s such institutions had become widespread. Savings and loans accepted deposits and used those deposits, along with other capital that was in their possession, to make loans. What was revolutionary was that the management of the savings and loan was determined by those that held deposits and in some instances had loans. The amount of influence in the management of the organization was determined based on the amount on deposit with the institution.
The overriding goal of the savings and loan association was to encourage savings and investment by common people and to give them access to a financial intermediary that otherwise had not been open to them in the past. The savings and loan was also there to provide loans for the purchase of large ticket items, usually homes, for worthy and responsible borrowers. The early savings and loans were in the business of "neighbors helping neighbors".
In the United Kingdom, the first savings bank was founded in 1810 by the Reverend Henry Duncan, Doctor of Divinity, the minister of Ruthwell Church in Dumfriesshire, Scotland. It is home to the Savings Bank Museum, in which there are records relating to the history of the savings bank movement in Great Britain, as well as family memorabilia relating to Henry Duncan and other prominent people of the surrounding area.
The savings and loan in the early 20th century
The savings and loan association became a strong force in the early 20th century through assisting people with home ownership, through mortgage lending, and further assisting their members with basic saving and investing outlets, typically through passbook savings accounts and term certificates of deposit.
Early mortgage lending
The earliest of mortgages were not offered by banks, but by insurance companies, and they differed greatly from the mortgage or home loan we are familiar with today. Most early mortgages were short term with some kind of balloon payment at the end of the term, or they were interest only loans which did not pay anything toward the principal of the loan with each payment. As such many people were either perpetually in debt in a continuous cycle of refinancing their home purchase, or lost their home when they were unable to make the balloon payment at the end of the term of that loan.
This bothered government regulators who then established the Federal Home Loan Bank and associated Federal Home Loan Bank Board to assist other banks in providing funding to offer long term, amortized loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes.
Savings and loan associations sprung up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.
Further advantages
Savings and loans were given a certain amount of preferential treatment by the Federal Reserve inasmuch as they were given the ability to pay higher interest rates on savings deposits compared to a regular commercial bank. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more mortgage loans which would keep the mortgage market liquid and funds would always be available to potential borrowers.
However, savings and loans were not allowed to offer checking accounts until the late 1970s. This impacted the attractiveness of being a savings and loan customer and required many of them to hold accounts across multiple institutions so they could have access to checking and receive competitive savings rates all at the same time.
A famous perception of savings and loans at this time was that they used the "3-6-3" business model:
- Take Deposits at 3 percent
- Lend at 6 percent
- Be on the golf course at 3 o'clock.
Regulatory changes
Savings and loan failures
The modern savings and loan
Modern savings and loan associations tend to look and feel like any other bank participating in retail banking. Recent changes in US regulations allow them to refer to themselves as banks or savings banks. The services offered today to individuals are similar, if not identical, to services offered by commercial banks or credit unions.
External links
- Office of Thrift Supervision (http://www.ots.treas.gov/)de:Sparkasse