THRIFTS
- During the eighteenth to the nineteenth
century, banks focus only on
- commercial or business customers and are not
interested in offering accounts to individuals
and households. Especially to those who belong
to members of the working class.
Thrift: Saving Banks and Loans, the first financial
institution to focus on serving families, especially the
working class.
Established to cater to the so-called “the little people.”
And to increase savings among the poor and working
class.
SAVINGS BANKS
❖ Previously called “mutual savings banks” or
“mutual savings associations”, as they were
owned and controlled by the depositors.
❖ Original intent of saving bank is to promote
savings among society of poor.
HISTORY (EUROPEAN HISTORY & US HISTORY)
- Hamburg, Germany (1778)
-The first saving bank was to be in Germany. The
institution took deposits and “spare cash of domestic
servants and handicraftsmen”
-They issued annuities instead of deposit accounts
- Tottenham, London (1798)
-A few years later, in Tottenham, a “Friendly Society for
the benefit of women and children” was created.
-Provided payments during times of illnesses, or a single
larger payment for “burial in case of death”
-Other objective of the society was to To fund loans and
create “a bank for savings”
-“Bank for savings” was formally organized and began
its operations in 1804.
- Reverend Joseph Smith of Wendover, England
(1799)
-Reverend Smith pass on his parish proposal, taking
deposits from his working-class parishioners during the
summer months and returned those deposits plus one
third at Christmas.
US HISTORY
❖ Savage’s Provident Institution for Savings
(James Savage, 1816)
- The founding of a saving bank was
recognized by the Massachusetts state
government in 1816.
- Put forward by Honorable James
Savage.
- The Massachusetts legislature approved
it on December 13, 1816.
- Starting the operation with a Promised
to pay depositors a return and
dividends.
SAVINGS AND LOANS
- Created to offer financial services to working
class families primarily focused on home
financing, became Building & Loans
associations.
- Building & Loans associations are composed of
a group of people who would pool their
money together for the purpose of building
homes.
- Those who cannot avail home mortgages from
commercial banks created their own Building
& Loans.
EVOLUTION OF RECENT THRIFTS
▼ The Great Depression caused several financial
institutions to close including thrifts.
▼ Federal Home Loan Bank Act created the Federal
Home Loan Bank System
A system of US government-sponsored banks designed
to increase the amount of low-cost funds available to
financial institutions for home mortgage loans, small-
business loans, agricultural loans, and rural economic
development loans
▼ Thrifts considered as “special”
• Paid higher interest rates on deposits than
commercial banks.
• Enhanced the availability of credit.
• Has the competitive edge for consumer-type
savings.
THRIFTS LOST ITS “SPECIAL” STANDING
• Inflationary pressure
• Growing competition (commercial banks
• The Interstate Rate Regulation Act extended
Regulation Q, the interest rate ceiling, to
include the thrifts.
-Limited in how much they could pay for those deposits
SAVINGS & LOANS CRISIS AND TODAY
Depository Institution Deregulation and Monetary
Control Act (DIDMCA)
❖ Passed by Congress in 1980, aimed to phase out
Regulation Q and allow credit unions and thrifts
to offer for the first-time, negotiable orders of
withdrawal (NOW Accounts).
❖ NOW Accounts - were basically checking
accounts that paid interests.
❖ Problem: Although it allowed thrifts to compete
for deposits in terms of money market mutual
funds, it also created a bigger problem, due to
the fact that their main source of revenue were
30-year mortgages with fixed interest, thrifts
were losing money with every deposit and was
simply not generating enough interest to cover
the thrifts interest expense.
Garn-St. Germain Depository Institutions Act of 1982
Is named after its two main sponsors:
❖ Congressman Fernand St. Germain – democrat
from Rhode Island.
❖ Senator Jake Garn – republican from Utah.
□ The act allowed Savings & Loans to make commercial,
corporate, business, or agricultural loans up to 10% of
the institution’s assets and increase their consumer
lending from 20% to 30% of assets and expand lending
to auto dealers.
Problem: Due to the wide variety of loans, now allowed
for Savings & Loans; desperate for high interest rates,
they started writing many risky loans that had little
chance of being fully repaid.
Savings and Loans had this idea of moral hazard
wherein operators simply saw it as a game wherein if
the risky loans paid off, then great; but if it didn’t pay
off, the government would repay them deposit
insurance.
Federal Home Loan Bank Board
❖ Federal Home Loan Bank Board are in charge of
closing thrifts that became insolvent.
The Zombie Institutions
❖ financial institutions that are insolvent but are
allowed by bank regulators to continue
operating. They were dead from an accounting
perspective but continued to lend as if they
were still alive.
❖ Problem: When zombie institutions offered
loans at low interest rates and offered high
interest to savers, it influenced the healthy
institutions to do the same causing problems to
the industry.
Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA)
❖ Abolished the Federal Home Loan Bank Board
and created the new Office of Thrift
Supervision (OTS) in the Treasury Department.
❖ Since the act closed down zombie institutions, it
created a new entity: Resolution Trust
Corporation (RTC)
Resolution Trust Corporation (RTC)
❖ a government agency in operation from 1989 to
1996 that was in charge of liquidating insolvent
thrift institutions and selling off the assets of
the failed institutions. It also arranged mergers
and bailouts for bankruptcy by still operating
thrifts.
CREDIT UNIONS
❖ A Credit union is a not-for-profit financial
institution that exists to serve its members
❖ Credit Union membership offers numerous
benefits, including access to a variety of
 services like simple savings, home equity loans,
IRAs and more
❖ The democratic nature of credit unions allows
all members to have an equal voice in the
operation of the organization regardless of the
amount of money each person has on deposit.
❖ When a person joins a credit union, they are
considered a member because they are one of
the owners and shareholders of the institution
❖ Because they are non-profits, Credit Union is
exempt from income tax.
Difference between Credit Unions and Banks
CREDIT UNION
➢ Credit Unions are Not-for-profit institution
➢ Credit Unions return earnings to members in
the form or lower loan rates, higher savings
rates, and free or low-cost services
➢ Each person who deposits money into the credit
union is a member with a share of ownership
➢ Credit unions are controlled by Board of
Directors elected by members
➢ Most Credit union board members are
volunteers
➢ Credit unions are only allowed to serve a select
group of individuals that have a common bonds
such as where they work, live or even their
religion
BANKS
➢ Banks are for-profit organization
➢ Banks returns profits to shareholders
➢ Customers have no ownership in the
corporation
➢ Banks are controlled by stockholders who elect
the Board of Directors
➢ Banks board members are generally paid for
their service
➢ Banks board members are generally paid for
their service
Hermann Schulze-Delitzsch
➢ Founded the first credit society in 1850 in
Germany
➢ After some years of trial and error, the initial
“loan association” came to closely resemble
the credit unions of today.
➢ Spent the rest of his life organizing “people
banks”
Friedrich W. Raiffeisen
❖ Considered the “father of the credit union
movement”
❖ In 1846 organized the Heddesdorf Credit Union
in Germany
❖ Founded rural cooperatives (loan societies) to
aid poor farmers
❖ Organized the first central banking association
to meet the liquidity needs of member credit
societies
Credit Unions in North America
Alphonse Desjardins
❖ He was the eighth of 15 children born to an
alcoholic day-laborer father and a mother who
had to do housework for neighbors (just to
feed their family)
❖ Didn’t finish college. After completing his
military service, he set out to become a
journalist and a political activist.
❖ A reporter outraged by testimony about lending
money with an interest rate.
❖ Operated the first financial cooperative in
Canada out of his home
❖ He launched the first credit union in North
America
Credit Unions Come to the United States
Pierre Jay
❖ A banker and bank regulator
 ❖ He serves as the banking commissioner for the
Commonwealth of Massachusetts from 1906 to
1909
❖ He learned of Desjardins’ work in Canada and
contracted him several times to learn how
credit unions operated there
❖ He’s interest culminated in a 1908 conference
on credit unions and passage of the
Massachusetts Credit Union Act a year later
Edward A. Filene
❖ A Boston retailer
❖ Dropped out of Harvard in 1890 to take over
running the family’s store when his father
became seriously ill
❖ He instituted employee profit sharing, a
minimum wage for women, a 40-hour work
week, paid vacations and health clinics for
employees
❖ He also engaged in collective bargaining with his
employees
❖ Provided the vision and financial support that
made the growth of credit unions possible in
the United States
Federal Credit Union Act
❖ In 1934, Congress passed a federal credit union
act which permitted credit unions to be
organized anywhere in the United States.
❖ The act allowed credit unions to incorporate
under either state or federal law, a system of
dual chartering that persists today.
❖ President Franklin D. Roosevelt signed the
Federal Credit Union Act in law in June 1934.
❖ requires annual independent audits for insured
credit unions with total assets of $500 million
or more,
❖ authorizes and clarifies a federally insured credit
union's right to convert to a mutual savings
bank or savings association without prior NCUA
approval,
❖ limits business loans to members to 12.25
percent of total assets,
❖ establishes new capital standards for insured
credit unions similar to those enacted for banks
and thrifts in 1991,
❖ gives the NCUA authority to base deposit-
insurance premiums on the reserve ratio of the
insurance fund and
❖ directs the Treasury to report to Congress on
differences between credit unions and other
federally insured financial institutions, including
the potential effects of applying federal laws—
including tax laws—to credit unions
CUNA is Formed
❖ In August 1934, the credit union idea spread so
fast that credit unions and leagues recognized
the need for a national organization
❖ The Credit Union National Association (CUNA)
was formed as a confederation of state leagues
at a meeting in Estes Park, Colorado
Credit Unions were founded for humble reason:
❖ Give people a place to save
❖ Give people a place to borrow at a reasonable
cost
Credit Union Motto:
“Not for profit, not for charity, but for service”
FINANCE COMPANIES
❖ Finance companies are commonly referred to as
"nonbank banks.”
❖ Nonbank banks differ from commercial banks in
that they only take deposits or make loans, not
both. Finance companies are a form of nonbank
that exclusively makes loans and does not
accept deposits.
TYPES OF FINANCE COMPANIES
Consumer Finance Companies
Finance companies that primarily offers small loans to
consumers or individuals
Auto Loans - offers automobile loans, most often FINANCING THE FINANCE COMPANIES
through car dealers.
▸ Bank Loans
Home Mortgages - offers mortgage
▸ Commercial Papers
Consumer Durables- offers loans on goods that do not
▸ Issuance of Bonds
wear out quickly ex. Refrigerators, Furniture, and
Televisions

Business Finance Companies

Finance companies that lend money to businesses

Floor-Plan or Inventory Financing

- for purchasing inventories.

Leasing

- made to borrow assets through a lease, lease

means a long-term rental.

Accounts Receivable Financing

- a firm would either use their Accounts

Receivable as a collateral on the loan or a firm
would enter into a factoring agreement
wherein an entity sells their accounts
receivable to a finance company at a discount

Ownership

The ownership structure of finance organizations

varies,which determines who they serve as customers
and the services they provide.

a. Captive Sales Finance Companies

-are established to help finance purchases

of the goods sold by the parent company

b. Sales Finance Companies

-finance the purchase of goods made by other

companies

c. Bank Subsidiaries

-finance companies that sit within a bank holding

company

d. Independent Finance Companies

-stand-alone firms and franchises of larger regional or

nationwide finance companies