SIC 6035 Savings Institutions, Federally Chartered
SIC 6035
This category includes savings and loan associations operating under federal charter and savings banks operating under federal charter. Both savings and loan associations and savings banks fall under the general term "thrifts." Thrifts are financial institutions that exist primarily to hold retail deposits and make residential mortgage loans. About half of all residential mortgage debt, or dollars lent to individuals for buying a home, is held by thrifts, though this market share has declined with the rise of mortgage bankers and the shrinking of the thrift industry. The thrift industry is the second largest type of financial institution, after commercial banks. This article deals only with federally chartered institutions; SIC 6036: Savings Institutions, Not Federally Chartered discusses state chartered institutions.
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Savings Institutions
According to the Office of Thrift Supervision (OTS), at the end of 2004, there were 1,345 thrift institutions in the United States, with total assets of $1.69 trillion (compared to roughly $8.6 trillion held by commercial banks). Of this total, 886 were regulated by the OTS, with total assets of $1.31 trillion, or 77.5 percent of all thrift assets. Federal savings banks accounted for over 87 percent of all regulated thrifty, and saving association accounted for the other 13 percent. The five largest federal thrifts held over 40 percent of the industry's assets.
The number of thrift institutions declined significantly since their peak of more than 4,800 during the late 1960s. This reduction was the result of regulatory changes that allowed some thrifts to become commercial banks. It also reflected the late-1990s and early 2000s flurry of mergers and acquisitions, a phenomenon that altered the nation's entire financial services world. The majority of the nation's thrifts (75 percent) were insured by the Savings Association Insurance Fund (SAIF). The small percentage (25 percent) of thrifts not insured by the SAIF was insured by the Bank Insurance Fund (BIF). Both the SAIF and the BIF are administered by the Federal Deposit Insurance Corporation (FDIC).
In 2004, of all federally-insured thrift institutions, 32 percent had assets totaling under $100 million, 56 percent had assets between $100 million and $1 billion; and 11 percent held assets in excess of $1 billion. Of the $1.1 trillion in real estate loans in 2004, the largest thrifts (with more than $1 billion in assets) made 85 percent of the loans. Loans for one- to four-family residential loans dominated business, accounting for 80 percent of all real estate loans and about 56 percent of all thrifty asset investment. Construction and land development, multifamily residential properties, farm, and nonfarm/nonresidential loans made up smaller portions of the thrift industry.
Some federal savings and loan associations are owned through the issuance of capital stock traded on the stock exchanges, just like any other corporation. Others are mutually owned. Mutually-owned savings and loans, or "mutuals," do not issue stock and are owned by the customers of the institution. Any customer who opens an account at a mutual becomes a part owner of the institution. The type of ownership—stock or mutual—and the type of institution—S&L or savings bank—is specified in the thrift's charter.
The Federal Home Loan Bank (FHLB) System is to thrifts what the Federal Reserve is to banks. It provides liquidity to federally chartered savings and loans, which must join it, and to any state chartered institutions that wish to join. Members are affiliated with one of the twelve regional FHLBs from which they may borrow. Such borrowing is not long term; a thrift does not go into debt to a FHLB for any extended period, only for a short period, often overnight. To fund such borrowing, FHLBs have credit with the U.S. Treasury and issue government agency debt bonds, much the way that the Federal Reserve sells Treasury bills. The twelve regional FHLBs were managed by the Federal Home Loan Bank Board until that board's abolition in 1989, after which they were managed by the Federal Housing Finance Board.
The many failures in the thrift industry, beginning in the late 1980s, brought the industry under careful scrutiny and regulation. The Office of Thrift Supervision (OTS), an agency within the U.S. Treasury Department, became the chief regulator of the thrift industry with the bailout law of 1989. Since the bailout law, thrifts are tightly regulated, mainly because the deposits of their customers are federally insured. It is to the taxpayer's advantage that thrifts be profitable. The OTS decides if a thrift is healthy and profitable enough to do normal business. The OTS charters, regulates, and examines the operations of federally chartered savings and loans.
The OTS classifies thrifts by capital levels and profitability. There are four such classifications, each of which corresponds to a particular level of capital: Group I thrifts are healthy institutions, fully capitalized, and profitable; Group II consists of those institutions that do not quite meet the capital guidelines for Group I but are expected to; Group III thrifts have poor earnings and low capital; and Group IV consists of those thrifts whose assets will be transferred to the Resolution Trust Corporation. By the end of 2004, there were just four problem thrifts, with assets of $709 million, identified by the OTS, down from 35 problem thrifts in 1996 and drastically down from 480 at the end of 1990.
For a thrift to be in OTS Group I, it must pass the following tests. First, 1.5 percent of assets must be in tangible capital. Tangible capital is stockholder's equity minus investments in activities that were legal before the bailout law but are no longer legal for thrifts to undertake. This condition existed because the thrift industry was in a period of transition in the early 1990s, with tighter regulations being phased in to minimize losses. Second, 3 percent of assets must be in leverage capital. Leverage capital is tangible capital plus the value, as judged by the OTS, of the firm's goodwill and intangible assets. Goodwill is defined as an asset equal to the market value of another institution a thrift purchases minus the value of its liabilities. The 1989 bailout law calls for goodwill to be phased out as part of the capital that a thrift reports. Third, 7.2 percent of a thrift's risk-weighted assets must be in total capital. Risk-weighted assets are obtained by assigning a weight to each kind of asset. For example, the amount of cash and government securities is multiplied by zero, while the amount of higher-risk assets is multiplied by as much as two times the face value of the asset. Total capital includes leverage capital less items being phased out, such as nonresidential construction loans, plus an allowance for general loan loss.
In addition to these capital guidelines, during at least three-fourths of each year, thrifts must invest 65 percent of assets in certain investments. Among these acceptable investments are residential mortgages, car loans, Fannie Mae loans (Fannie Mae is a private company offering "the nation's largest source of financing for home mortgages"), home equity loans, and investment in the Resolution Trust Corporation. The idea behind this last requirement, known as the Qualified Thrift Lender Test, is that none of these acceptable investments is of the high-risk venture capital or commercial real estate variety that became popular areas for thrift investments during the years after the 1980 deregulation.
If a thrift does not comply with the above guidelines for Group I, it must submit a plan to the OTS, stating how it will meet them and comply within 60 days. If this compliance does not happen, the OTS places restrictions on the thrift, such as limiting the growth in the amount of future loans and further limits on the kinds of loans the thrift may make. The delinquent thrift also may not purchase an interest in any other company.
The Federal Deposit Insurance Corporation (FDIC) is the provider of deposit insurance for all depository institutions. The FDIC controls the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF). Therefore, the FDIC has an interest in assuring that thrifts stay profitable so as not...
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