The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

years. Some of these privileges included tax benefits which required an unusually heavy investment in long-term, fixed-rate mortgages, and "low-cost" passbook deposits which could not be acquired through direct price competition. It is unfortunate that this asset-liability structure tended to maximize the interest rate risk exposure of the SLAs. Thus it is no surprise that during the credit crunches of the fifties, sixties, and early seventies the SLA industry had some serious problems, and beginning in 1980 the industry started dying as a result of the higher interest rates.

Beginning in the mid-seventies, congressional actions began to turn against the SLA industry. SLAs were no longer being seen as the best route through which to promote the housing industry. Instead, they were seen as an inhibitor to congressional socioeconomic goals and found themselves imposed with the additional operating expenses associated with such acts as the CRA and RESPA. However, simultaneous with these restrictive laws were rules and regulations which began to "liberate" both the asset and liability powers of the SLA industry. Liberation of the liability side preceded that of the asset side. Some of the liberation came as a response to the developments in the economy. An example would be the money market and other special certificates which were authorized to offset the disintermediation resulting from the combination of high interest rates and the development of money market mutual funds. Other parts of the liberation came as a response to the dramatic problems of the industry. Examples of this form of liberation include the move toward adjustable mortgages, expanded consumer lending authority, commercial lending and deposit authority, and expanded powers in using financial futures contracts.

The industry today has the capability to be substantially different than it was ten or even seven years ago. The important question, however, is whether these new capabilities will really help the industry. That is the issue to which we turn in the remaining chapters.


NOTES
1.
At the year-end of 1981, there were 4,034 members. Of these, 3,884 were SLAs, 148 were mutual savings banks, and two were life insurance companies. For further details see '82 Savings and Loan Sourcebook, United States League of Savings Associations, Chicago, Ill., p. 44.
2.
Much of the material in the first half of this chapter is drawn from Thomas B. Marvell , The Federal Home Loan Bank Board, Praeger, New York, 1969.
3.
Savings and Loan Fact Book, 1973, U.S. Savings and Loan League, Chicago, Ill., p. 57.
4.
Marvell, Bank Board, p. 7.
5.
Ruth Werner, "The Federal Home Loan Bank System," Federal Home Loan Bank Board Journal, April 1982, p. 16.
6.
Werner, "Bank System," p. 17.
7.
Ibid.

-23-

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The Savings and Loan Industry: Current Problems and Possible Solutions
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables ix
  • Acknowledgments xi
  • Introduction xiii
  • Note xv
  • Abbreviations xvii
  • 1 - History of the Federal Home Loan Bank System 3
  • Notes 23
  • 2 - The Determinants of Profitability for Savings and Loans 28
  • 3 - Measuring the Interest Rate Risk Exposure of Savings and Loans 49
  • Notes 67
  • 4 - Alternative Mortgage Instruments 70
  • Notes 97
  • 5 - Financial Futures and Forward Commitments 104
  • Notes 121
  • 6 - Consumer Lending 124
  • Notes 135
  • 7 - The Elimination of Interest Rate Ceilings 138
  • Notes 148
  • 8 - The Introduction of Now Accounts 152
  • Notes 160
  • 9 - Mergers and Conversions 163
  • SUMMARY AND CONCLUSIONS 184
  • 10 - The Future 189
  • Notes 195
  • Bibliography 197
  • Index 211
  • About the Author 217
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