A thrift bank, often referred to as a thrift, is a type of financial institution that specializes in offering savings accounts and originating home mortgages for consumers. They are also sometimes known as Savings and Loan Associations (S&Ls). Thrift banks differ from larger commercial banks as they usually provide higher yields on savings accounts and offer limited lending services to businesses.
While thrift banks primarily focus on traditional savings accounts and home loan origination, they also provide checking accounts, personal and car loans, and credit cards for consumers. Their primary attention, however, remains on home financing for single-family residences. Thrifts can be structured either as corporate entities owned by shareholders, or as mutually owned institutions owned by their borrowers and depositors.
Key Takeaways
- Thrift banks, also known as Savings and Loan Associations (S&L), specialize in offering savings accounts and originating home mortgages for consumers.
- Besides traditional savings accounts and home loan origination, thrift banks also offer checking accounts, personal and car loans, and credit cards.
- Since the Savings and Loan Crisis (1986-1995), many structural changes have blurred the distinctions between thrift banks and conventional banks.
History of Thrift Banks
The concept of thrift institutions began with the establishment of customer-owned building societies in the United Kingdom in the early 18th century. In the United States, these concepts evolved into Savings and Loan Associations (S&L). The primary drive behind the founding of S&Ls in the U.S. was to improve the mortgage market, making home financing more accessible.
In the early 20th century, U.S. mortgages typically were five to 10-year, interest-only loans that required a large balloon payment at the end. Many homeowners defaulted on these payments, particularly during periods of high unemployment such as the Great Depression.
In 1932, President Herbert Hoover passed the Federal Home Loan Bank Act to encourage homeownership by providing member banks with low-cost funds for mortgage loans. This act led to the creation of the Federal Home Loan Bank Board, tasked with developing a secondary market for mortgages, and established S&Ls to issue these loans.
The Impact of Thrift Banks
Thrift banks have had a profound impact on homeownership in the U.S. One significant measure was the introduction of a mortgage insurance program by the Veterans Administration in 1944, which significantly helped war veterans and their families purchase homes in the suburbs post-WWII. From the 1960s through the 1970s, the majority of mortgages were issued through thrifts and S&Ls, contributing drastically to rising homeownership rates.
During the Savings and Loan Crisis (1986-1995), many thrift institutions failed due to poor lending practices. Structural reforms post-crisis, such as the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Dodd-Frank Act of 2010, have since made significant changes to the operation and regulation of thrift banks.
Despite stringent regulations, thrift banks remain committed to serving consumers, primarily focusing on mortgage loans for residential property.
Types of Thrift Banks
Thrift banks come in various forms, including savings banks, private development banks, and stock savings and loan associations.
Differences Between Thrift Banks and Commercial Banks
Thrift banks primarily cater to consumers by offering accounts and loans, unlike commercial banks which serve both consumers and businesses. Thrift institutions are generally smaller and more localized compared to the nationwide reach and resources of commercial banks. Despite this, thrift banks now increasingly provide similar services to those of commercial banks.
Understanding Mutual Savings Banks
Many thrift banks are mutual savings banks, where account holders are also shareholders. This structure is akin to credit unions, but the key difference is that mutual savings banks operate for profit, whereas credit unions are non-profit entities.
The Bottom Line
Commercial banks, thrift banks, and credit unions are the three major types of depository institutions in the U.S. Thrift banks (or Savings and Loan Associations) are funded mainly by consumer deposits and specialize in offering savings accounts and originating home mortgages. Despite challenges and regulatory changes, thrifts continue to play a vital role in making homeownership accessible while offering other banking services akin to those provided by commercial banks.
Related Terms: commercial banks, credit unions, mutual savings banks.
References
- Compare Closing LLC. “What Is A Thrift Bank? The Major Advantages And Disadvantages”.
- The American Presidency Project. “Statement About Signing the Federal Home Loan Bank Act”.
- Green, Richard K. and Susan M. Wachter via Repository of University of Pennsylvania “The American Mortgage in Historical and International Context”, Journal of Economic Perspectives, pp. 94-97.
- Comply Advantage. “What is the Dodd-Frank Act?”
