What are Thrift Institutions?

John Lister

Thrift institutions are financial institutions that specialize in providing consumer savings and mortgages. They are also known in the United States as savings and loan companies. Similar organizations have different names in other countries, such as building societies, though the precise legal definitions and requirements vary from country to country.

A savings and loan is a financial institution focused on providing interest-bearing savings accounts and certificates of deposit, while also offering home loans.
A savings and loan is a financial institution focused on providing interest-bearing savings accounts and certificates of deposit, while also offering home loans.

The idea of thrift institutions came about in the early 19th century when banks realized there was a gap in the market. At this time banking services were generally only used by particularly wealthy people. The thrift institutions gathered more ground in the US in the mid-20th century when affordable and available mortgages meant more people were able to own their own homes.

Originally, most thrift institutions were mutual associations. This meant they were owned by their customers, who were classed as members of the institution. Theoretically, the customers controlled the institution, although this voting power didn't usually extend to day-to-day decisions. Because the organization didn't have shareholders, it would not have to pay dividends and could instead distribute any profits in the form of lower interest rates. In many cases, maximising profit was not the main goal of the institution.

Today, the status of thrift institutions varies immensely. Some are privately owned by stockholders, while others are even publicly traded. This means they have stopped being true mutual associations. This change can be classed as "demutualisation," though this term is not commonly used in the United States.

Historically, thrift institutions had some advantages under US banking laws. For example, they were allowed to offer higher rates on savings deposits. They were also offered funding from a government agency, the Federal Home Loan Bank, to make it easier for them to offer mortgages to a wider range of customers. There were some disadvantages, most notably that they could not offer checking accounts to customers.

In the late 1980s and early 1990s, thrift institutions went through a particularly poor patch, which led to roughly half of them closing. There were multiple reasons why this happened and some people disagree about which of these reasons were most significant. In some cases, the cause was fraudulent activity, exacerbated by a change in rules that made it easier for individuals to take control of the institutions and avoid full scrutiny. Another problem was increased competition in both savings and loans, caused partly by technological advances that made it easier for new financial institutions to get into business. There is also an argument that regulations were relaxed too much, allowing those in control of institutions to take too many risks with the loans which they made, including those that were more complicated than simply lending to a single householder to fund a home purchase.

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