Chapter 21 Thrift Operations Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning All rights reserved Chapter Outline Background on savings institutions  Sources and uses of funds  Exposure to risk  Management of interest rate risk  Valuation of a savings institution  Interaction with other financial institutions  Chapter Outline (cont’d) Participation in financial markets  Performance of savings institutions  Savings institution crisis  Background on credit unions  Sources and uses of credit union funds  Credit union exposure to risk  Regulation of credit unions  Background on Savings Institutions  Savings institutions include savings banks and S&Ls  S&Ls are the most dominant type  Savings institutions are mainly concentrated in the Northeast  The insuring agency for S&Ls is the Savings Association Insurance Fund (SAIF)  The insuring agency for savings banks is the Bank Insurance Fund (BIF)  Both agencies are administered by the FDIC  Savings banks and S&Ls are very similar in their sources and uses of funds Background on Savings Institutions (cont’d) 2% 20% 78% More than $1 billion Between $100 million and $1 billion Less than $100 million Background on Savings Institutions (cont’d)  Ownership  Most SIs are mutual (owned by depositors)  Many SIs have shifted their ownership structure from depositors to shareholders through mutual-to-stockconversions    Allow SIs to obtain additional capital by issuing stock Provide owners with greater potential to benefit from performance Make SIs more susceptible to hostile takeovers Background on Savings Institutions (cont’d)  Ownership (cont’d)  In  an acquisition, both SIs have to be stock-owned Merger-conversion  The number of SIs today is about one-half of the number in 1994  The total assets of stock SIs has increased by more than 60 percent since 1994  The total assets of mutual SIs has remained steady since 1994 Background on Savings Institutions (cont’d)  Regulation of savings institutions     Regulated at both the state and federal level Federally chartered SIs are regulated by the Office of Thrift Supervision (OTS) State-chartered SIs are regulated by the state that has chartered them Regulatory assessment of SIs    Regulators conduct periodic onsite examinations of capital and risk Monitoring is conducted using the CAMELS rating Deregulation of services  Recently, SIs have been granted more flexibility to diversify products Sources of Funds  Deposits  Most funds come from savings and time deposits such as passbook savings, CDs, and MMDAs  Since 1981, SIs are allowed to offer NOW accounts as a result of DIDMCA  Since 1982, SIs are allowed to offer MMDAs as a result of the Garn-St Germain Act  Since 1978, SIs are allowed to offer retail CDs with rates tied to Treasury bills Sources of Funds (cont’d)  Borrowed funds     SIs can borrow from other depository institutions in the federal funds market SIs can borrow at the Fed’s discount window SIs can borrow through repos Capital   The capital (net worth) of SIs is composed of retained earnings and funds obtained from issuing stock SIs are required to maintain a minimum level of capital 10 .. .Chapter Outline Background on savings institutions  Sources and uses of funds  Exposure to risk... rate risk  Valuation of a savings institution  Interaction with other financial institutions  Chapter Outline (cont’d) Participation in financial markets  Performance of savings institutions