The nature of savings and loan associations (S&Ls) has changed over time. S&Ls, along with savings banks and credit unions, are known as thrift institutions. Thrifts and commercial banks are also known as depository institutions and are distinguished from nondepository institutions such as investment banks, insurance companies, and pension funds. S&Ls traditionally have taken savings, time, and demand deposits as their primary liability, and made most of their income from lending deposits out as mortgages.

The first savings and loan association was organized in 1831 as the Oxford Provident Building Association of Philadelphia. Like the building societies of England and the credit cooperatives of Europe, it was a membership organization that took savings deposits from its members and in turn made home loans to them. S&Ls soon accepted deposits from the general public and became public depository institutions. They also became the primary source of credit for working individuals to purchase their own homes at a time when commercial banks did not offer mortgages. By the end of the 19th century there were nearly 6,000 S&Ls in existence.

S&Ls may be member owned, or they may be owned by stockholders. Member owned S&Ls are known as mutual associations. Individual states may allow S&Ls to incorporate under general corporation laws and issue stock. An S&L may have a federal charter or a state charter. Federal charters became available to S&Ls in 1933 with the passage of the Home Owners' Loan Act. Federal charters are issued by the Home Loan Bank Board (HLBB) and may be obtained by new institutions or by converting from a state charter. Since the start of 1934, savings deposits at S&Ls have been insured by the Federal Savings and Loan Insurance Corporation (FSLIC). The establishment of both the HLBB and the FSLIC came in the aftermath of the Great Depression.

The S&L industry thrived in the postwar era of the 1950s and 1960s until the interest rate volatility of the 1970s and early 1980s exposed it to losses on its holdings of long-term, low-interest-rate mortgages. As interest rates rose, investors were able to obtain a better return on their investments by purchasing money market certificates that were tied to the higher rates. The assets of money market funds increased from $12 billion in 1979 to $230 billion by the end of 1982. A lot of that money came from deposit accounts at S&Ls as well as from low-paying accounts at commercial banks.

It wasn't only rising interest rates, however, that brought on the S&L crises of the 1980s. By their very nature, S&Ls were always in a position of borrowing short and lending long. That is, the deposits they took in could be withdrawn on short notice, but their assets were tied up in long-term mortgages for the most part. In an era of stable interest rates, that formula worked fine, allowing S&Ls to increase their assets from just $17 billion in 1950 to $614 billion in 1980. During that period S&Ls were not allowed by law to pay an interest rate higher than 5.5 percent on demand deposits.

With 85 percent of all S&Ls losing money in 1981, the S&L industry was entering its first crisis of the decade. The federal government responded by lowering the capital standards for S&Ls while at the same time increasing the deposit insurance ceiling per account from $40,000 to $100,000. It was an era of federal deregulation in many industries, and in effect many S&Ls were not subject to rigorous examinations for years at a time.

In an attempt to keep S&Ls competitive with other financial institutions, many of the regulations were changed during the 1980s. S&Ls were allowed to engage in a variety of banking activities that had previously been prohibited. They could offer a wider range of financial services and were given new operating powers. Two key pieces of legislation were the Gamn-St. Germain Depository Institutions Act of 1982 and the Depository Institutions Deregulation and Monetary Control Act of 1980.

While the government's policies were intended to encourage growth in the S&L industry, the effect was entirely different. The increase in deposit insurance meant that it was the FSLIC and not the S&L managers who were at risk when bad loans were made. As a result of the lowering of capital standards, many insolvent and weakly capitalized S&Ls made risky loans that eventually led to the second S&L crisis in the late 1980s.

In 1988 more than 200 S&L failures were resolved by the HLBB selling the S&Ls to individuals and firms. In 1989 Congress passed the Fiancial Institutions Reform, Recovery and Enforcement Act (FIRREA), which among other things established the Resolution Trust Corporation (RTC) to seize control of an estimated 500 insolvent S&Ls. In addition to selling insolvent S&Ls and otherwise trying to resolve them, the RTC also had the power to prosecute S&L officials for criminal wrongdoing. The RTC was supervised by the newly created Thrift Depositor Protection Oversight Board, part of the U.S. Department of the Treasury.

The RTC was abolished December 31, 1995, after completing its cleanup of the savings and loan industry. Between 1989 and 1991 the RTC floated $50 billion worth of bonds to fund the S&L bailout. During its tenure from 1989 to 1995 the RTC closed or merged 747 savings and loan institutions and sold nearly $450 billion in assets, including 120,000 pieces of real estate. According to Business Week, the agency recouped 86 percent of the assets of failed S&Ls, or $395 billion of a total of $456 billion in assets. Incidentally, under federal guidelines any RTC contract for $500,000 or more required a minority or female subcontractor, resulting in $1.6 billion worth of service and legal contracts for women- and minority-owned businesses. As a cost-saving measure, the Thrift Depositor Protection Oversight Board was abolished in October 1998. Its only remaining task, the retirement of the RTC bonds, was taken over by the U.S. Department of the Treasury.

Before Congress enacted FIRREA, the FSLIC and HLBB encouraged healthy S&Ls to take over failing institutions rather than have them declared insolvent and have to pay off their depositors. Under a system known as "supervisory goodwill," healthy S&Ls that acquired failing S&Ls were able to carry the difference between the failing S&Ls' assets and liabilities as capital on their books. That helped healthy S&Ls meet their minimum capital requirements. When Congress enacted FIRREA in 1989, it reduced the allowable period for carrying that "goodwill" from 40 years to five years. The S&L industry considered that a breach of contract on the government's part, and there resulted a series of lawsuits and appeals throughout the 1990s. By 1998 it appeared that the healthy S&Ls that incurred financial damages as a result of acquiring failing S&Ls would finally win their cases after the government had exhausted the appeals process.

In 1996 the S&L industry recapitalized its deposit insurance fund, making it safer to own an S&L. By 1998 the S&L industry was healthy, and there was an increase in the number of applications for S&L charters. Large insurance companies and brokerage firms that wanted to build an integrated financial services company were interested in owning an S&L, because that was the only way they could get into full-service banking. S&Ls could do virtually everything a bank could do except service large corporate customers and actively trade bonds. Thrifts could be owned by any type of company, and they faced less regulation from the Office of Thrift Supervision than banks did from their regulatory agencies.

[ David P. Bianco ]


Anason, Dean. "U.S. Closes Office that Oversaw S&L Bailout." American Banker, 28 October 1998.

Domi, Olaf De Senerpont. "Court Says 24 Goodwill Suits Really Weren't Filed Too Late." American Banker, 16 January 1997, 2.

"Four … Three … Two … One (Resolution Trust Corp. Ends)." Building Design and Construction, February 1996, 9.

Fox, Justin. "Thrifts Readying Goodwill Claims: U.S. Seen Unlikely to Settle Up Fast." American Banker, 6 September 1995, 4.

Glancz, Ronald R., and others. "Why Insurers Are Buying Thrifts Now." National Underwriter Life and Health/Financial Services Edition, 2 March 1998, 31-32.

LaFemina, Lorraine. "The Thrifts Strike Back and Banks Remain Strong." LI Business News, 5 August 1996, 21.

McNamee, Mike. "Hear the Banks Howling?: The S&Ls Are Back." Business Week, 7 December 1998, 54.

"RTC Shuts Its Doors: Lucrative Program Helped Many Black Owned Firms." Black Enterprise, March 1996, 22.

"The RTC's Epitaph: It Worked." Business Week, 15 January 1996, 29.

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