Savings Institutions

I INTRODUCTION  
Savings Institutions, banks or associations originally established to encourage personal thrift through the deposit of individual or family savings that accrued earnings in the form of interest. In the U.S., the major savings institutions are savings and loan associations (SLAs) and savings banks.

II SAVINGS AND LOAN ASSOCIATIONS  
Financial institutions devoted to the thrift and homeownership needs of the American public are known primarily as savings and loan associations. They represent the second largest group of financial institutions in the U.S.; only commercial banks account for more savings deposits and assets. SLAs are also known as cooperative banks (in New England) or homestead associations (in the state of Louisiana).

The American savings and loan business began in Frankfort, Pennsylvania, in 1831, with the creation of the Oxford Provident Building Association, patterned after British building societies of the time. This business in the U.S. was founded because commercial banks dealt primarily with the nation's commercial and industrial needs. The Oxford Provident was created so that ordinary individuals would have a place to invest their money and borrow funds to buy a home.

In the early days, most savings associations were terminating institutions—that is, their sole purpose was to enable members to purchase a home. Each member would deposit a monthly payment, and the institutions were set up so that these payments would allow one member per month to buy a home. The member who was granted a mortgage then paid monthly installments until the debt was satisfied. The terminating associations remained in business until all members had received funds to purchase homes, and then they were usually dissolved.

The success of Oxford Provident and other similar institutions led to the development of the serial association. Members were admitted on a quarterly, semiannual, or annual basis to these institutions, which had a continuing life. Many of these newer savings associations accepted members who wanted to save, but not necessarily to buy a home. Borrowers were charged interest on their loans; savers were repaid their contributions plus earnings at the completion of their contracts. This important development encouraged the accumulation of capital for reasons other than, or in addition to, the purchase of homes.

The third step in the evolution of the savings and loan business was the organization of permanent associations that accepted members on a daily basis and paid out earnings in regular installments. These institutions financed homes and charged interest much as they do today.

In 1933 the U.S. Congress created the Federal Home Loan Bank Board (now the Office of Thrift Supervision) to oversee federally chartered SLAs. The Savings Association Insurance Fund (SAIF) insures savers' deposits, a responsibility formerly exercised by the Federal Savings and Loan Insurance Corporation (FSLIC).

The real growth of the savings and loan business came after World War II, tracking the boom in housing. Before the 1940s, fewer than half of all Americans owned their homes; today, nearly two out of every three families own their dwellings. In 1987 there were about 2900 federally chartered or state-chartered SLAs, of which some 2650 were insured; the total number of associations was 49 percent less than in 1970, reflecting a trend toward the consolidation of smaller institutions into larger operating units. Financial difficulties experienced by associations in several states in the 1980s stimulated efforts to make federal deposit insurance universal.

Total assets of savings institutions in 1987 were $1.52 trillion. Savings deposits in SLAs totaled about $737 billion in 1987, compared to $1.54 trillion in commercial banks. Savings deposits form the basis of funds that SLAs have available to lend to home buyers. Because these institutions are the nation's primary source of home mortgages, the growth in savings deposits is directly related to the growth of the housing market. In 1940, for example, SLAs accounted for 22.5 percent of the mortgages on one- to four-family dwellings; in 1987, savings institutions held 59 percent of all mortgage debt outstanding.
Most mortgages made by SLAs do not involve government guarantees and are made at the lenders' own risk.

American homeowners have generally proved to be very good risks. Even so, by 1988 many SLAs had experienced severe financial losses and hundreds of insolvent institutions had been shut down by the Federal Home Loan Bank Board. A bailout bill passed by Congress in 1989 allocated more than $160 billion over a 10-year period to restructure the savings and loan industry while preserving depositors' assets.

III TRADITIONAL SAVINGS BANKS  
Savings banks are services to the public. In 1987 the U.S. had 983 savings banks, with deposits totaling approximately $408 billion.

The first savings bank was established in Ruthwell Village, Scotland, in 1810. It was the conception of the Reverend Henry Duncan, who attempted to relieve the poverty of his congregation by providing a means for ready saving of small sums. The idea was adopted in 1816 in the U.S. with the formation of two savings banks, one in Boston and the other in Philadelphia.

Traditional savings banks have no stockholders, and their assets are administered for the sole benefit of present and future depositors, with earnings paid to such depositors after expenses are met and reserves are set aside for depositors' protection Federal Deposit Insurance Corporation. During the 1980s savings banks were in a great state of flux; many began to provide the same kinds of services as commercial banks.

Since 1982 savings banks have been permitted to convert to federal charters, a move that has blurred many of the distinctions between SLAs and savings banks. SLAs also may convert to savings banks and are federally chartered and insured by SAIF. Savings institutions now offer a full range of financial services including multiple savings instruments; checking accounts in the form of Super NOW and NOW accounts; consumer, commercial, and agricultural loans; trust and credit card services.