Many S&Ls were originally set up as "mutual" operations, which like credit unions and mutual savings banks were "owned" by their depositors. While mutually owned S&Ls continue to operate, most S&Ls are corporations owned by profit-seeking shareholders.

S&Ls can be chartered either by the federal government or by one of the fifty states. They have been around since the 1830s and have been instrumental over the decades in helping the middle class obtain home ownership. Economic and financial turmoil in the 1970s triggered a substantial number of S&Ls bankruptcies and a reorganization of the industry in the 1980s. And while the number of institutions has fallen they remain an important financial intermediary.

An Expanding Financial Role

• Homes Across America: Savings and loan associations have long been major players in the home mortgage market. Their original function in the economy was in fact to provide low-cost mortgage loans using funds obtained from simple passbook savings accounts. And even as they have expanded their services to include checking accounts and other types of loans, and even as other financial institutions (especially traditional banks) offer mortgage loans, S&Ls continue to play a key role home mortgage market.


• A Little More Money: As their financial scope has expanded, S&Ls now also play an important role in the economy's money supply. Like traditional banks, credit unions, and mutual savings banks, savings and loan associations offer checkable deposits and thus contribute to the economy's money supply. The first checking accounts issued by S&Ls where termed Negotiable Orders of Withdrawal (NOW) accounts (largely because traditional banks had the exclusive legal authority to offer checking accounts). However, most S&Ls now use the term checking accounts.


• State and Federal: For the first hundred years of their existence, savings and loan associations were charted by state governments, much like any business. However, the Federal Home Loan Bank Act, passed in 1932, created a system of federally chartered S&Ls. In the modern world, S&Ls can be chartered (and thus subject to regulation) by either the federal government or one of the fifty state governments. The federally chartered S&Ls are automatically part of the Federal Home Loan Banking System and state chartered S&Ls can voluntarily join the system.

A Bit of History

• The Early Years: The first savings and loan association to operate in the U.S. economy was the Oxford Provident Building Association, established in 1831 in Frankford, Pennsylvania. Like similar organizations that existed in England in the early 1800s, this was a cooperative, mutual organization set up to help members build and purchase housing. Members pooled their savings, then made loans to other members.

  Over the ensuring decades other S&Ls were established, providing a valuable home-financing service for folks in the working class, a service that was not readily provided by traditional banks.



• The Depression: Like the rest of the financial industry, a number of changes hit the S&Ls during the Great Depression of the 1930s. One change was the Federal Home Loan Bank Act of 1932. This act created a means for federally chartering S&Ls as part of a Federal Home Loan Bank system centered on twelve Federal Home Loan Banks. This system was comparable to the Federal Reserve System set up for traditional banks in 1913. It regulated member S&Ls, as well as providing important services, such as access to low-cost funds.

  Another depression-era change was the Federal Savings and Loan Insurance Corporation (FSLIC), created by the National Housing Act of 1934 to ensure S&L deposits. The FSLIC was the S&L counterpart to the Federal Deposit Insurance Corporation (FDIC) for traditional banks. The FSLIC was officially abolished in 1989 with S&L deposit insurance services taken over by the FDIC.



• The 3-6-3 Rule: From the 1940s through the early part of the 1970s, S&Ls played a major role in the home ownership suburbanization boom of the emerging middle class. S&Ls were often small, neighborhood institutions, rarely extending their reach beyond local neighborhoods. Local residents deposited a few bucks each month in passbook savings accounts. S&Ls then used these funds to finance the purchase of homes within the neighborhood. They often operated by what was affectionately termed the 3-6-3 rule. They paid 3 percent interest one savings accounts, charged 6 percent interest and mortgage loans, and the employees were en route to the golf course by 3 o'clock in the afternoon.


• The Turbulent Years: The 1970s marked the beginning of changes for both S&Ls as well as other financial institutions. High inflation rates, exceeding 10 percent for several years, triggered high interest rates. S&Ls found themselves in a predicament. Most of their revenue came from long-term mortgage loans with paltry 6 percent interest rates, but to remain competitive they were forced to substantially higher rates on deposits. To compensate, they sought other sources of funds, including the introduction of checkable deposit NOW accounts. They also made high-risk, non-mortgage loans that regenerated more revenue... if payments were actually made.

  For some S&Ls the long-term, low-rate mortgage loans and the high-rate, high risk non-mortgage loans were not sufficient to cover the high interest cost of obtaining funds. Like other businesses with expenses exceeding revenue, a significant number of S&Ls went bankrupt. During the 1980s about half of the S&Ls had financial problems. Some simply went out of business, some merged with traditional banks or other S&Ls, and some reorganized assets and liabilities to become stronger institutions. This turbulence also forced the collapse of the Federal Savings and Loan Insurance Corporation (FSLIC) fund used to insure S&L deposits. Then end result was that the remaining S&Ls became more competitive with, and functioned more like, traditional banks.

The Regulators

• Federal Home Loan Bank System: All federal-chartered and many state-chartered S&Ls are automatically of the Federal Home Loan Bank System. This system includes the Federal Housing Finance Board (FHFB) and twelve Federal Home Loan Banks (FHLB). In addition to providing access to low-cost funds, the FHFB and FHLBs have regulatory oversight of S&Ls.


• Federal Deposit Insurance Corporation: S&L deposits are insured by the Savings Association Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). The FDIC and the SAIF took over S&L deposit insurance after the Federal Savings and Loan Insurance Corporation (FSLIC) after went bankrupt in the 1980s.


• Federal Reserve System: Savings and loan associations are also subject to money supply regulations by the Federal Reserve System. Because S&L checking accounts are included in the checkable deposits component of the M1 money supply, S&Ls come under the same money supply regulations that were original established to control checkable deposits held by traditional banks.

Two Other Thrift Institutions

• Credit Unions: Credit unions are non-profit depository financial institutions that were established to provide members of a specific group, such as employees of a company, with low-cost personal loans. Credit unions were founded, often by labor unions, over concerns that traditional banks were not providing adequate services to working class consumer, especially personal loans.


• Mutual Savings Banks: Mutual savings banks are something of a cross between credit unions and savings and loan associations. They are nonprofit, like credit unions, but originally specialized in mortgage loans, like savings and loan associations. Mutual savings banks were created for reasons similar to that of credit unions--concern that traditional banks were not providing adequate services at reasonable prices.