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    Chapter17 Chapter17 Presentation Transcript

    • Power Point Slides for:
      • Financial Institutions, Markets, and Money, 9 th Edition
      • Authors: Kidwell, Blackwell, Whidbee & Peterson
      • Prepared by: Babu G. Baradwaj, Towson University
      • And
      • Lanny R. Martindale, Texas A&M University
    • CHAPTER 17 THRIFT INSTITUTIONS AND FINANCE COMPANIES
    • Institutions Covered
      • Thrift Institutions
        • Savings Associations (or S&Ls)
        • Savings Banks
        • Credit Unions
      • Finance Companies
    •  
    • Historical Origins of Thrifts
      • Mutual Savings Banks were developed in the 1800s because commercial banks did not serve the needs of small savers.
      • Eventually Mutual Savings Banks invested most of their deposits in mortgage loans.
      • Mutual Savings and Loan Associations and Building Societies were also started in the 1800s by groups of people who pooled their savings so that each would eventually be able to acquire a house.
    • Recent History of Thrifts
      • Stockholder-owned savings and loan associations were relatively uncommon until the late 1970s and 1980s when pressure to attract more capital encouraged many mutual S&Ls to convert to stock form.
      • Stock S&Ls outnumber mutuals today.
      • Assets of stock S&Ls are many times as large as the assets of mutual S&Ls.
    • Exhibit 17.3A: Number of Thrift Institutions Source: Office of Thrift Supervision, 2003 Fact Book, May 2004.
    • Exhibit 17.3B: Assets of Thrift Institutions Source: Office of Thrift Supervision, 2003 Fact Book, May 2004.
    • Thrift Crisis of the 1980s
      • Classic model of thrift management involved a negative maturity GAP:
        • Short-to-medium term fixed-rate savings deposits financing
        • Medium-to-long-term fixed-rate mortgages
      • Thus the sharp interest rate increases of the early 1980s decimated the industry
      • The problem was compounded by unsound lending practices and other forms of mismanagement
    •  
    •  
    • Regulation of Thrifts
      • Savings bank regulators—
        • Federal regulator : Office of Thrift Supervision
        • Insurer: FDIC-SAIF
      • Savings association (S&L) regulators—
        • Federal regulator: OTS
        • Insurer: FDIC -either subsidiary, depending on prior election
      • State regulators also charter and supervise thrifts
      • Federal Home Loan Banks: 12 regional Federal Home Loan Banks empowered to borrow in capital markets and make loans (called “advances”) to thrifts in their regions. Regulatory powers mostly transferred to OTS. Banks still in place but Federal Home Loan Bank Board abolished in 1989
    • Assets of Thrifts
      • Residential mortgages still main asset (about 47%) because of tax break
      • Other loan types about 21% of industry assets
      • Liquidity management comparable to commercial banks
      • “ OREO ”— Other Real Estate Owned—acquired in foreclosures
    •  
    • Liabilities of Thrifts
      • Deposits are key, but deposit types are much more varied today
      • Advances from FHLB are most important nondeposit source of funds
      • Fed funds present but less important as either source or use compared to banks
    •  
    • Capital Accounts, Standards & Terms analogous to banks
      • Tier 1/ Tier 2
      • Risk-weighting of assets
      • Minimum ratios
    •  
    • Income, Expenses, & Performance
      • Structure of income statement comparable to banks
      • Net Interest Margin about 3%,; below commercial banking but stable
        • deposit rates have fallen more rapidly than mortgage rates
        • institutions take much less interest rate risk than they used to
      • Provision for loan losses reflects sounder lending practices
      • Industry ROAA averages around 1.3%; ROAE around 14%.
    •  
    •  
    •  
    • Credit Unions
      • Mutual institutions organized much like a club with each member(share owner) having a vote to elect the board of directors.
      • Membership requires a common bond (e.g., same employer, church, trade association).
      • Credit Union Assets have grown steadily in recent years.
    • Crucial Differences from Other Depository Institutions
      • Always and strictly mutually owned; organized like clubs
      • Common-bond membership/exemption from antitrust constraints. Most common bonds are occupational.
      • Others are associational/fraternal or residential
      • Not-for-profit and therefore tax-exempt
      • Expected to concentrate on smaller consumer loans
    • Credit Union Regulation
      • Regulated by the National Credit Union Administration (NUCA).
      • Deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF).
      • Liquidity is provided by the Credit Liquidity Facility (CLF).
    • Credit Union Assets
      • Credit union member loans constitute over 60 percent of total CU assets.
      • Other assets include cash and investments.
    • Credit Union Liabilities
      • Regular Share Accounts are like savings accounts
      • Share certificates are time deposits like CDs, and have become a more important source of funds
      • Share drafts are CU interest-bearing checking accounts.
      • Notes Payable/Certificates of Indebtedness
      • Net worth includes reserves and undivided earnings.
    • Credit Union Developments
      • Small credit unions are merging or liquidating
      • Credit unions are adopting new technologies, especially larger credit unions
      • Funds flows are becoming increasingly coordinated
      • Corporate central credit unions - correspondent banking for credit unions
      • Powerful trade associations/lobbying groups -CUNA - NAFCU
    • Finance Companies
      • Lenders to businesses and consumers who are higher risk borrowers.
      • Highly leveraged; borrowing funds from banks and the open market.
      • Most larger finance companies are now subsidiaries of bank and financial holding companies.
      • Many "nonbank" banks or consumer banks are similar to finance companies.
      • Finance companies are diverse and adaptive to changing needs.
    • Finance Company Assets
      • Investment securities, real assets, cash, and deposits represent a small percent of assets.
      • Consumer receivables (loans)
        • Personal loans.
        • Automobile credit.
        • Mobile home credit.
        • Revolving Consumer Installment Credit.
        • Other Consumer Installment Credit.
      • Real Estate Lending (second mortgages) is the fastest growing area of finance company lending.
    • Finance Company Assets, cont.
      • Business credit -- area of growth in recent years
        • Wholesale paper -- loans to finance inventories. "Floor plan" is a type of wholesale paper.
        • Retail paper -- purchase of consumer sales (loan) contracts from retailers.
        • Lease paper -- leasing business equipment and consumer durables.
        • Commercial accounts receivable financing.
        • Factoring -- the purchase of accounts receivables.
    • Liabilities and Net Worth
      • Net worth: highly leveraged.
        • Net worth level directly related to riskiness of loan portfolio.
        • But cannot neglect N/W; borrowing ability depends on credit rating
      • Debt:
        • Bank debt
        • Commercial paper
        • Transfer credit from parent companies
        • Long-term debt when rates are low
    • Regulation of Finance Companies: Consumer Protection more than Safety & Soundness
      • Interest rate ceilings on loans, but phased out in most states
      • Debt collection practices
      • Branching, chartering, and merger restrictions
      • Truth-in-lending
      • Bankruptcy protections
    • Finance Company Developments
      • Securitization
      • Shift toward business credit
      • Shift toward second mortgage lending
      • Growth of leasing
      • Growth of home equity credit lines
      • Decline in small finance companies