The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

2
The Determinants of Profitability for Savings and Loans

Although during recent years most SLAs have been losing money, some were still profitable and some were losing only small amounts of money. These differences in profitability have not been purely coincidental. Several reasons account for these differences and are important because they not only provide further insight as to how the industry got into its current problems, but they also provide insight as to the value of some of the changes which are occurring in the industry at the present time.

Before considering the determinants of profitability, it is important to understand what type of profitability should be measured. The type depends on the goals of the firm. Evidence suggests that the goals and objectives of SLAs are neither universally accepted nor without ambiguity. A simple description of a basic savings and loan operation, however, results in the definition of three basic decision areas affecting SLA profitability, all of which, in turn, are affected by the particular economies of scale associated with a savings and loan operation.


THE MANAGERIAL GOAL IN AN SLA

A common assumption in the financial theory literature is that the goal of the manager of a firm is to maximize the shareholder's wealth, and for stock corporations wealth would be measured in terms of the market value of the common stock. 1 The savings and loan industry, however, has traditionally been a mutual industry with a steadily growing representation of stock corporations. The concept of a maximization of owner-wealth as a goal for a mutual entity is at best ambiguous and at times rejected. Alfred Nicols has pointed out that:

Spokesmen from the mutual side of the business often attack their rivals, the stock companies, because of their interest in profit making. Mutuals are said to be superior because they have different goals: they are primarily interested in home financing; they are not watching the stock market; they are not interested in profits but rather the safety of the

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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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