Definition / Meaning of Thrift / Savings & Loan
A thrift institution, also known as a Savings and Loan Association (S&L), is a type of financial institution that primarily focuses on accepting savings deposits and making mortgage loans. Unlike a commercial bank, which serves a wide range of customers and offers a broad array of services, thrifts are specialized. Their main purpose is to promote homeownership by providing affordable home loans to individuals and families. This specialization is rooted in their history and the regulations that govern them.
History and Purpose
The thrift industry was born in the early 19th century as a way to help working-class people save money and buy homes. Before thrifts, mortgages were often short-term and difficult to obtain. These institutions, often called building and loan associations, allowed members to pool their savings and lend to each other for home construction. This cooperative model was the foundation of the industry. The Savings and Loan crisis of the 1980s and 1990s, caused by risky lending and deregulation, led to major changes. Many thrifts failed, and the industry was restructured. Today, thrifts are less common but still play a vital role in the housing market.
Key Differences from Commercial Banks
While the lines have blurred over time, traditional thrifts differ from commercial banks in several key ways:
- Primary Focus: Thrifts are required by law to have a high percentage of their lending in residential mortgages. Commercial banks have a more diversified loan portfolio, including business loans, credit cards, and auto loans.
- Ownership Structure: Many thrifts are mutually owned, meaning they are owned by their depositors and borrowers, not by outside shareholders. Commercial banks are typically owned by shareholders.
- Regulation: Historically, thrifts were regulated by the Office of Thrift Supervision (OTS), but after the 2008 financial crisis, this agency was merged into the Office of the Comptroller of the Currency (OCC). Today, both thrifts and banks are regulated by similar agencies, but some differences remain.
- Services: Thrifts traditionally offered fewer services than commercial banks, focusing on savings accounts, checking accounts, and mortgages. Today, many offer a full range of services, but their lending is still heavily weighted toward mortgages.
How a Thrift Works
A thrift operates by taking deposits from customers, which are insured by the FDIC (or NCUA for credit unions, though thrifts are not credit unions). These deposits are then used to fund mortgage loans. The thrift earns money by charging interest on the loans, which is higher than the interest it pays on deposits. The difference, known as the net interest margin, is the thrift’s primary source of profit. Because their loan portfolio is concentrated in mortgages, thrifts are especially sensitive to changes in interest rates. When rates rise, the cost of deposits may increase faster than the income from existing fixed-rate mortgages, squeezing their profits.
Types of Accounts and Services
Thrifts offer many of the same accounts and services as commercial banks, including:
- Savings Accounts: The core product, offering a safe place to earn interest on deposits.
- Checking Accounts: For everyday transactions, often with fewer fees than big banks.
- Certificates of Deposit (CDs): Time deposits with fixed terms and higher interest rates.
- Mortgage Loans: The primary lending product, including fixed-rate and adjustable-rate mortgages.
- Home Equity Loans and Lines of Credit: Loans secured by the borrower’s home equity.
Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| Often offer higher interest rates on savings and lower rates on mortgages due to their focus on housing. | May have fewer branch locations and ATMs compared to large national banks. |
| Can provide more personalized customer service, especially for mortgage needs. | May offer a more limited range of financial products, such as fewer investment options. |
| Mutual thrifts are owned by their customers, which can lead to a focus on customer satisfaction rather than shareholder profits. | More vulnerable to downturns in the housing market and interest rate fluctuations. |
Thrifts Today
The number of thrift institutions has declined significantly since the 1980s. Many have converted to commercial bank charters or have been acquired by larger banks. However, those that remain continue to serve an important niche, particularly in local communities. They are often a good choice for individuals and families looking for a mortgage or a place to save for a home purchase. When choosing a financial institution, it is worth comparing the rates and services of a local thrift with those of commercial banks and credit unions to find the best fit for your needs.