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savings and loan association

The Columbia Encyclopedia, Sixth Edition | Date: 2008

savings and loan association type of financial institution that was originally created to accept savings from private investors and to provide home mortgage services for the public.

The first U.S. savings and loan association was founded in 1831. In 1932, the Federal Home Loan Bank System was created to oversee the savings and loan associations, with deposits to be insured by the Federal Savings and Loan Insurance Corporation (FSLIC). Since 1933 the federal government has chartered savings and loan associations, although they have not generally been required to be federally chartered. After World War II, the associations began a period of rapid expansion. Historically, savings and loan associations could be organized in two ways: either as a mutual or a capital stock institution. A mutual organization would be similar in operation to a mutual savings bank .

The savings and loan institution went through many changes in recent years, primarily due to deregulatory measures instituted in the 1980s by the U.S. federal government, allowing them to offer a much wider range of services than ever before. The deregulatory measures allowed savings and loan associations to enter the business of commercial lending, trust services, and nonmortgage consumer lending. The Depository Institutions Deregulation and Monetary Control Act of 1980 began these sweeping changes, one of which was to raise deposit insurance from $40,000 to $100,000. Many contend that this extension of insurance coverage encouraged savings and loan associations to engage in riskier loans than they might otherwise have sought.

Two years later, the Depository Institutions Act gave savings and loan institutions the right to make secured and unsecured loans to a wide range of markets, permitted developers to own savings and loan associations, and allowed owners of these institutions to lend to themselves. Under the new laws, the Federal Home Loan Bank Board (FHLBB) was given a number of new powers to secure the capital positions of the savings and loan associations. Under these new laws, the FHLBB allowed savings and loan associations to print their own capital, and escape charges of insolvency through such measures as "goodwill," in which customer loyalty and market share were counted as part of a capital base. As a result, a thrift that was technically insolvent could resist government seizure.

Savings and loan associations began to engage in large-scale speculation, particularly in real estate. Financial failure of the institutions became rampant, with well over 500 forced to close during the 1980s. In 1989, after the FSLIC itself became insolvent, the Federal Deposit Insurance Corporation took over the FSLIC's insurance obligations, and the Resolution Trust Corporation was created to buy and sell defaulted savings and loan associations. The Office of Thrift Supervision was also created, in an attempt to identify struggling savings and loan organizations before it was too late. The U.S. government expects it will cost more than $500 billion over 30 years to bail out the savings and loan associations.

Bibliography: See A. Teck, Mutual Savings Banks and Savings and Loan Associations (1968); F. E. Balderston, Thrifts in Crisis: Structural Transformation of the Savings and Loan Industry (1985).



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The Columbia Encyclopedia, Sixth Edition. Copyright 2008 Columbia University Press