Savings and loans offer interest-bearing savings accounts, certificates of deposits, and home equity loans. They were created to promote thrift and homeownership, with some being community-based or larger chain banks. In the US, reforms were made in the 1930s to help struggling Americans complete mortgages with reduced foreclosure risk. However, in the late 1970s, the savings and loan crisis occurred due to deregulation and changes in property values. Critics argue that the structure of savings and loans makes them vulnerable to changes in the economy.
A savings and loan, also sometimes known as a thrift, is a financial institution that focuses on providing interest-bearing savings accounts and certificates of deposits to its members, while also offering home equity loans. The idea behind a savings and loan is that it should encourage thrift on the part of its members while providing people with an opportunity to access home ownership with the assistance of finance offered through the bank. Such organizations can be community-based or they can be larger chain banks.
The first savings and loans were initiated in the 1800s, as part of a larger social movement that was intended to promote responsibility, thrift, and the opportunity for social advancement for members of the middle class. This banking model has proved extremely popular in many regions of the world. Some institutions were run on a cooperative basis, with profits returned to members, while others were run as publicly traded companies or private institutions.
In the United States, steps were taken to promote saving and lending in the 1930s, a time when many Americans were struggling financially. These steps included some reforms in how mortgages were offered and managed, with the goal of allowing people to complete mortgages with a reduced risk of foreclosure. By law, a savings and loan had to offer at least 65% of its loans in the form of mortgage loans, making most of its assets mortgage-backed.
In the late 1970s, rumblings in the financial sector had a profound effect on the savings and loan industry, eventually causing the savings and loan crisis. The government has initiated large-scale deregulation of these institutions, and this has combined with dramatic changes in property values to push the value of these institutions down. Nearly 800 savings and loans failed in the US during this period and dragged even conventional banks down in some regions.
A number of critics have pointed out that the structure of a savings and loan can make it very vulnerable. By law, it cannot diversify its assets, concentrating value in mortgages, which means it will be highly susceptible to changes in property values and changes in the economy. The decision to deregulate in the 1980s without putting in place protective measures has been pointed to as the reason these institutions have failed so spectacularly and in such large numbers.
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