Markets and Institutions 26
what makes credit unions different from other depository institutions
1. Mutual savings banks owned by depositors; S&Ls owned by shareholders 2. Mutual savings banks tended to be concentrated in the Northeast U.S.; S&Ls were all over the country 3. Mutual savings banks may insure their deposits with the states or with the FDIC; S&Ls may not 4. Mutual savings banks are not as heavily concentrated in mortgage loans as S&Ls
why mutual savings banks, S&Ls, and credit unions were originally created
1816: Congress decides to encourage home ownership by creating mutual savings banks and S&Ls. Thus, mutual savings banks and S&Ls primarily focus on making mortgage loans to households by taking in savings account deposits. Originally created to encourage saving by the poor, they soon came to serve the middle class as well
Garn-St Germain (1982)
Designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits
asset structure of S&Ls and credit unions
Regulated by the states, not part of the Federal Reserve System A number of S&L failures occurred in the early years of the Great Depression 1932: Federal Home Loan Bank Act created the FHLB Board (FHLBB) and gave thrifts the choice of being state or federally chartered 1934: FSLIC established to provide deposit insurance
FIRREA (1989)
Abolishes the FHLBB and FSLIC Switches S&L regulation to newly created Office of Thrift Supervision (OTS) Deposit insurance function shifted to the FDIC A new entity, the Resolution Trust Corporation, is created to liquidate the insolvent S&Ls Re-regulated the industry back to its pre-1982 status.
DIDMCA (1980) Depository Institutions Deregulation and Monetary Control Ac
Aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded. Deposit insurance limit raised to $100,000 from $40,000
Competitive Banking Act (1987)
The Act established new standards for expedited funds availability, recapitalized the Federal Savings & Loan Insurance Company (FSLIC), and expanded FDIC authority for open bank assistance transactions, including bridge banks. The primary motive was to aid the deteriorating FSLIC, but provisions affecting commercial banks were included
what problems thrifts faced in the 1970s and how this set the stage for the S&L Crisis
o High inflation leads to negative real interest rates on the capped savings deposits and because non-banks are offering money market accounts, S&L accountholders withdraw large amounts of deposits o Fed restricts money supply to rein in inflation, causing interest rates to rise o Since S&Ls were locked in at a low rate on their loans, the value of the loans fell o Happened after the great depression
S&L Crisis?
o Over 1,000 S&Ls failed (total S&Ls was 4,000) o According to some estimates, over half of S&Ls were insolvent (assets < liabilities) o Ultimate cost was $150 billion o About $125 billion was paid for by the federal government, increasing the US budget deficit
Federal Credit Union Act (1934)
source of authority for all federally chartered credit unions and governs the coverage and terms of insured accounts at all federally insured credit unions. It also determines the structure and duties of NCUA.
