Savings and Loan Associations (S&Ls), also known as building and loan associations, were originally established to provide a mechanism for people to save money and obtain loans to purchase or build homes. Over time, their scope of services has expanded to include a variety of other loans. This entry delves into the history, operations, and contemporary role of S&Ls.
Historical Context of Savings and Loan Associations
Origin and Early Functions
S&Ls originated in the early 19th century in the United States. Designed to promote home ownership, these institutions pooled deposits from members and provided mortgage loans. These loans were typically granted at favorable interest rates:
Evolution Over Time
Post-World War II, the role of S&Ls expanded significantly:
- 1960s onwards - Began offering a broader range of financial products.
- 1980s - Faced a crisis due to high interest rates and regulatory changes leading to insolvency for many institutions.
- Modern Day - Offer diverse financial services including personal loans, car loans, and business loans.
Operational Structure of Savings and Loan Associations
Membership and Savings
Members deposit savings into accounts. They earn interest on these deposits:
Loan Distribution
Primary loans are mortgage loans but can extend to various other loan types:
- Mortgage Loans
- Automobile Loans
- Personal Loans
- Business Loans
S&Ls must adhere to strict regulatory requirements governing their operational limits.
Special Considerations in Savings and Loan Associations
Regulatory Framework
The regulatory landscape for S&Ls is stringent to protect depositors’ interests and maintain financial stability. Key regulatory bodies include:
- Office of the Comptroller of the Currency (OCC)
- Federal Deposit Insurance Corporation (FDIC)
Interest Rate Risks
S&Ls are particularly sensitive to interest rate fluctuations due to their loan profiles, which are predominantly long-term, fixed-rate mortgages.
Examples and Case Studies
Case Study: Savings and Loan Crisis (1980s)
The S&L crisis resulted in the failure of nearly a third of the 3,234 savings and loan associations in the United States between 1986 and 1995. The crisis was triggered by deregulation, fraud, and the inability of S&Ls to adapt to increasing interest rates.
Comparisons with Other Financial Institutions
S&Ls vs. Commercial Banks
| Feature | S&Ls | Commercial Banks |
|---|---|---|
| Primary Function | Home loans | Diverse financial services |
| Typical Interest Rates | Lower for mortgages | Varied |
| Regulatory Body | OCC, FDIC | OCC, FDIC, Federal Reserve |
| Market Focus | Homebuyers | General public and businesses |
Related Terms
- Building and Loan Association: Another term for S&Ls, initially focused exclusively on home loans, reflecting their origins.
- Thrift Institution: A financial institution that emphasizes personal savings and home loans, encompassing S&Ls and savings banks.
FAQs
What is the primary purpose of a Savings and Loan Association?
How are S&Ls regulated?
What caused the Savings and Loan crisis?
References
- Barth, J. R. (1991). “The Great Savings and Loan Debacle.” American Enterprise Institute.
- White, E. N. (1992). “The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation.”
Summary
Savings and Loan Associations (S&Ls) play a crucial role in the financial landscape by providing essential home loans and various other financial services. Despite historical challenges, they continue to be important institutions supporting home ownership and personal savings. Regulatory frameworks and market conditions deeply impact their operations, emphasizing the need for rigorous oversight and adaptive strategies in a dynamic financial environment.
