The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

6
Consumer Lending

One of the features of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was the expansion of the consumer lending authority granted to SLAs. Consumer lending authority is simply the privilege to provide nonmortgage loans to individuals. This expanded authority, which was enhanced further in late 1982, has long been advocated by many groups and individuals, including Irwin Friend, in his edited collection, Study of the Savings and Loan Industry; Leo Grebler, in his The Future of Thrift Institutions; the Report of the President's Commission on Financial Structures and Regulations; the United States Savings and Loan League; the National Commission on Consumer Finance; and the Office of Economic Research at the FHLBB. Although all the groups have supported consumer lending authority, they have differed as to the reasons.

The earlier arguments in favor of the expanded lending authority centered on two premises. The first was that the expanded authority would increase the profitability of SLAs and thus make them financially stronger institutions. The second was that consumer loans would provide extra liquidity because they had such short maturities that the consumer loan portfolio could be relatively quickly reinvested in other assets such as mortgages should such a need arise. 1 In other words, they supplement the liquidity position of the thrift associations.

Recent research suggests that these two premises are probably not valid but that two other reasons can be mustered to support the contention that the expanded lending authority would be beneficial for the industry. The first is that as short-term loans, consumer loans have a low duration and thus would reduce the interest rate risk exposure of the savings and loans. The second is that consumer loans are highly likely to lead to greater mortgage loan demand and higher deposit growth rates, both of which should serve to increase profits. Loan demand and deposits would increase because many of the individuals acquiring consumer loans at SLAs are presumed to return to the SLA with their deposits and mortgage applications.

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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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