Savings and Loan Associations

Definition

Savings and loan associations, also known as thrifts, are financial institutions that primarily accept deposits from and lend to individuals and families, with a focus on residential mortgages. They are a type of depository institution that plays a significant role in the U.S. financial system as part of the broader category of financial institutions covered in Chapter 15.3.

5 Must Know Facts For Your Next Test

1. Savings and loan associations are required to maintain a minimum of 65% of their assets in residential mortgages and other housing-related loans.
2. They were originally established in the 19th century to promote home ownership and provide access to affordable mortgages for the general public.
3. Savings and loan associations experienced a significant crisis in the 1980s due to a combination of factors, including high interest rates, poor management, and risky lending practices.
4. After the savings and loan crisis, the industry underwent major restructuring and consolidation, leading to a significant decline in the number of savings and loan associations in the United States.
5. Today, savings and loan associations continue to play a role in the mortgage market, but they face increasing competition from commercial banks and other financial institutions.

Review Questions

• Describe the primary focus and purpose of savings and loan associations within the U.S. financial system.
  • Savings and loan associations, or thrifts, are financial institutions that primarily accept deposits from and lend to individuals and families, with a particular focus on residential mortgages. They were originally established to promote home ownership and provide access to affordable mortgages for the general public. As depository institutions, savings and loan associations play a significant role in the U.S. financial system by channeling funds from savers to borrowers, particularly in the housing market.
• Explain the regulatory requirements and challenges faced by savings and loan associations over time.
  • Savings and loan associations are subject to specific regulatory requirements, such as maintaining a minimum of 65% of their assets in residential mortgages and other housing-related loans. This focus on the housing market made them vulnerable to the savings and loan crisis of the 1980s, which was caused by a combination of factors, including high interest rates, poor management, and risky lending practices. The crisis led to a significant restructuring and consolidation of the industry, resulting in a decline in the number of savings and loan associations in the United States. Today, these institutions continue to face increasing competition from commercial banks and other financial institutions as they navigate the evolving financial landscape.
• Analyze the role of savings and loan associations in the broader context of the U.S. financial system and their impact on the housing market.
  • Savings and loan associations, as a type of depository institution, play a unique and important role within the U.S. financial system. By primarily focusing on accepting deposits from and lending to individuals and families, with a particular emphasis on residential mortgages, these institutions have historically contributed to promoting home ownership and providing access to affordable housing. However, the savings and loan crisis of the 1980s highlighted the vulnerabilities of this specialized business model, leading to significant restructuring and consolidation within the industry. Today, while savings and loan associations continue to operate in the mortgage market, they face increased competition from commercial banks and other financial institutions, which has shaped their evolving role and impact on the broader housing market and the U.S. financial landscape.

Related terms

Thrift: Another term used to describe savings and loan associations, emphasizing their focus on personal savings and lending.

Residential Mortgage: A loan used to finance the purchase or refinancing of a residential property, which is a key focus for savings and loan associations.

Depository Institution: A financial institution that accepts deposits from the public and uses those funds to make loans and investments, which includes savings and loan associations.