Topic 6: Thrifts & Finance Companies Flashcards
A financial institution formed primarily to accept consumer deposits and make home mortgages
Thrifts
Are generally smaller, local institutions and don’t have the reach or resources of a large national bank
Thrifts
Formerly called as mutual savings bank or mutual savings association
Savings Banks
Why are savings banks mutual?
It’s because they are owned and controlled by the depositors
What is the core function of savings banks?
To promote savings among society’s poor
When was the first savings bank formed?
Hamburg, Germany in 1778
What did the first savings bank issued?
Annuities instead of offering deposit
What do some people believed the first savings bank was made?
1799 in Southeast England by Reverend Joseph Smith
What did Smith offered from his savings bank?
He offered a proposal to take deposits from his parishioners during summer and return the deposits plus one-third at Christmas
Which government authorized the creation of a savings bank? When was it?
Massachusetts Government in 1816
What is the promised rate of the banks to pay to the depositors?
1% return quarterly
What is the raised of the promised rate?
1.25% quarterly or 5% annually
Similar functions to savings bank but primarily focused on home financing
Savings and Loans Association
What association is where a group of people in the 19th century would pool their money for the purpose of building homes? Then the chosen family would repay the loan for 30 years for cost and interest?
Building and Loans Association
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
Federal Home Loan Banking System (1932)
What rule do thrifts follow?
3-6-3 rule (3% on deposits, lend money at 6%, and hit the golf course by 3pm)
The postwar crisis subjected commercial banks to ___________, which prohibits them to pay interest in demand deposits.
Regulation Q
Why do thrifts pay higher interest rates often?
Because there were no explicit regulations on interest rates and dividends
Why are thrifts viewed as special?
Because these institutions enhanced the availability of credit for housing” and thus “they should be given an advantage in the competition from consumer-type savings”
In 1962, how many basis points did commercial banks raise?
50 basis points
In 1962, how many basis points did savings and loans raise?
15 basis points
When and why did thrifts lose their special standing?
In 1966, thrifts lost their special standing because they were included in Regulation Q
Is a savings bank in Massachusetts, spearheaded by Honorable James Savage, with a goal of increasing savings among the poor and working class
Provident Institution for Savings
- Phased out Regulation Q
- Allowed credit unions and thrifts to offer NOW accounts (Negotiable Orders of Withdrawal)
- Allowed thrifts to compete for deposits with money market mutual funds and more
Depository Institution Deregulation and Monetary Control Act of 1980 (DIDMCA)
In DIDMCA, thrifts could pay _____________________
market rates of interest
In DIDMCA, the main source of revenue was the _______ mortgages with fixed interest
30-year
Is named after its two main sponsors: Congressman Fernanrd St. Germain and Senator Jake Garn
Garn-St. Germain Depository Institution Act of 1982
Allowed Savings & Loans to make commercial, corporate, business,
or agricultural loans up to 10% of the institution’s assets after January 1, 1984
Garn-St. Germain Depository Institution Act of 1982
In the Garn-St. Germain Depository Institution Act, how much rate is now allowed for Savings and Loans?
from 20% to 30%
Financial institutions that are insolvent but are allowed by bank regulators to continue operating
Zombie Institutions
Why are some institutions called “Zombie Institutions”?
Because they were dead from an accounting perspective but continued to lend as if they were still alive
How did Zombie Institutions infected the healthy insntitutions?
They offered loans at low interest rates to well-qualified lenders and offered high interest rates to savers, forcing the healthy institutions to do the same
Made by the Congress and signed by President George H.W in 1989
Financial Institutions Reform, Recovery and Enforcement (FIRREA)
Abolished the Federal Home Loan Bank Board
FIRREA
Creation of the Office of Thrift Supervision (OTS) in the Treasury Dept.
FIRREA
A government agency made by the FIRREA operating from 1989 to 1996
Resolution Trust Corporation (RTC)
Sold off the assets of failed institutions and using the proceeds from those sales to pay off depositors
Resolution Trust Corporation (RTC)
Arranged mergers and bailouts for bankruptcy
Resolution Trust Corporation (RTC)
Former CEO who destroyed Washington Mutual Bank
Kerry Killinger
United States’ largest savings and loan association until its collapse in 2008
Washington Mutual, Inc.
Like thrifts, both focus primarily on servicing households
Credit Unions
Are nonprofit institutions
Credit Unions
Owners are in a form of common bond
Credit Unions
Created a credit society of merchants and working-class that would borrow money from each other with low-interest rates back in the mid-nineteenth century
Franz Herman Schulze-Delitzsch
Created a credit society that is recognizable as it is today (free from subsidies from the wealthy)
Friedrich Wilhelm Raiffeisen
First credit union over Atlantic (North America) was in Canada back in 1900s
The Caisse D’Épargne Desjardins
- organized the first credit union
- a journalist and political activist back then
Alphonse Desjardins
Englishman who wrote the use of credit cooperatives to the rural poor
Henry William Wolf
First operation of the Caisse D’Épargne Desjardins
January 23, 1901
Allowed credit unions to be organized anywhere in the United States
Federal Credit Union Act of 1934
a banking commissioner for the Commonwealth of Massachusetts and observed how employees created their small credit unions
Massachusetts Credit Union by Pierre Jay
- Owner of family inherited business
- Spent his life for the expansion of nonprofit financial cooperatives
Edward Filene
When did the congress passed the legislation for credit unions to expand and include business lending
1998
When did small business administrations expanded lending programs with credit unions?
2003
When did National Credit Union Association (NCUA) allowed well-capitalized credit unions to make unsecured business loan
October 2003
receive unfair subsidy by not paying corporate income taxes
Credit Union Controversies
Financial Intermediaries that make loans to both individuals and businesses
Financial Intermediaries
Sometimes described as “Nonbank banks”
Finance Companies
They only make loans and generally do not take deposits
Finance Companies
- Created in the 19th century as retailers extended credit to individuals and families to purchase consumer goods
- Provide loans to businesses as well as households
Finance Companies
- Finance companies that lend to individuals and families
- Most often they lend to people who do not have access to traditional banking services because of a lack of credit, poor credit history, low income or uneven employment
Consumer Finance Companies
Offer automobile loans most often through car dealers
Auto Loans
A loan that uses real estate as collateral
Home Mortgages
People who do not have access to traditional banking services such as credit cards turn to finance companies to borrow money to purchase things like furniture and home appliances
Consumer Durables
- Also known as “business credit institutions” because they lend money to business
- This type of finance company have expanded their lending to businesses because there is less regulation over business lending than consumer lending
Business Finance Companies
Retailers borrow from a finance company to pay their goods. The finance company maintains a lien on the goods until they are repaid. The retailer sells the goods and repays the finance company with interest
Floor Plan or Inventory Financing
- A long-term rental
- Instead of buying assets such as trucks, heavy equipment, and machinery, a firm may find it advantageous to lease the equipment instead because smaller firms do not have cash available to purchase these expensive items
Leasing
- A firm uses their Accounts Receivable as collateral on a loan from a finance company
- They can either borrow against their ARs or enter into a factoring agreement wherein they sell their ARs to the finance company at a discount
Accounts Receivable Financing
In either case, the firm is turning a relatively illiquid asset, their accounts receivable, into a liquid asset
Accounts Receivable Financing
Established to help finance purchases of the good sold by the parent company
Captive Sales Finance Companies
Started out as finance companies, but they finance the purchase of cost of good made by other companies
Sales Finance Companies
Some finance companies sit within a bank company
Bank Subsidiaries
It has the ability to make its own decisions as to what types of value propositions it wants to provide its customers
Independent Finance Companies
Use their funds to make consumer loans, business loans, and even real estate loans
Financing Finance Companies
