Savings and loans offer savings accounts, certificates of deposit, and home loans to encourage savings and home ownership. They began in the 19th century and were popular worldwide. In the US, reforms were made in the 1930s to promote savings and loans. Deregulation in the 1980s led to the savings and loan crisis, with nearly 800 institutions failing. Critics argue that the structure of savings and loans makes them vulnerable to changes in home values and the economy.
A savings and loan, also known as thrift, is a financial institution that focuses on providing interest-bearing savings accounts and certificates of deposit to its members, while also offering home loans. The idea behind a savings and loan is that it is supposed to encourage savings on the part of its members and at the same time give people the opportunity to access home ownership with the help of financing offered through the bank. Such organizations may be community-based or may be larger chain banks.
The first savings and loans began in the 19th century, as part of a broader social movement that aimed to promote responsibility, prosperity, and the opportunity for social advancement for members of the middle class. This banking model proved tremendously popular in many regions of the world. Some institutions were run cooperatively, with profits returned to members, while others were run as publicly traded companies or private institutions.
In the United States, steps to promote savings and loans were taken in the 1930s, a period when many Americans were struggling financially. These steps included some reforms to the way mortgages were offered and handled, with the goal of making it possible for people to hold mortgages to completion with 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, which made up the bulk of the mortgages on its assets.
In the late 1970s, rumors in the financial sector had a profound effect on the savings and loan industry, eventually leading to the savings and loan crisis. The government initiated large-scale deregulation of these institutions, and this combined with sweeping changes in real estate values to reduce the value of these institutions. Nearly 800 savings and loans failed in the United States during this period, and in some regions, they dragged down conventional banks as well.
Many critics have pointed out that the structure of a savings and loan can make it very vulnerable. By law, you can’t diversify your assets by concentrating value in mortgages, which means you’ll be highly susceptible to changes in home values and changes in the economy. The decision to deregulate in the 1980s without putting some protective measures in place has been pointed to as the reason why these institutions failed so spectacularly and in such large numbers.
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