Thrifts

Thrifts are financial institutions that focus on accepting savings deposits and making mortgage loans, including savings and loan associations, savings banks, and credit unions.
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Updated on May 31, 2024
Reading time 5 minutes

3 key takeaways

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  • Thrifts, also known as thrift institutions, specialize in accepting savings deposits and providing home mortgage loans.
  • Types of thrifts include savings and loan associations, savings banks, and credit unions, each with distinct characteristics and regulatory frameworks.
  • Thrifts play a crucial role in providing affordable mortgage financing and promoting homeownership.

What are thrifts?

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Thrifts, or thrift institutions, are financial institutions that primarily focus on accepting savings deposits from individuals and making mortgage loans to borrowers. They were originally established to encourage savings and provide affordable home financing. Thrifts include savings and loan associations, savings banks, and credit unions. Each type of thrift operates under specific regulations and serves different purposes within the financial system.

Types of thrifts

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There are three main types of thrift institutions:

  • Savings and Loan Associations (S&Ls): Also known as building and loan associations, these institutions focus on accepting savings deposits and providing mortgage loans. They were initially established to help individuals save money and finance home purchases.
  • Savings Banks: Similar to S&Ls, savings banks accept savings deposits and offer mortgage loans. They often provide a broader range of financial services, including consumer loans and commercial real estate loans.
  • Credit Unions: Credit unions are member-owned financial cooperatives that accept savings deposits and provide loans to their members. They operate on a not-for-profit basis and aim to serve the financial needs of their members, often offering lower fees and better interest rates compared to traditional banks.

Functions of thrifts

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Thrifts perform several essential functions within the financial system:

  • Accepting Deposits: Thrifts accept savings deposits from individuals, providing a safe place for people to save money and earn interest.
  • Providing Mortgage Loans: One of the primary functions of thrifts is to provide home mortgage loans to individuals, promoting homeownership and making housing more affordable.
  • Community Development: Thrifts often focus on serving local communities, providing financial services to individuals and small businesses, and contributing to community development and economic growth.

Role of thrifts in the financial system

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Thrifts play a vital role in the financial system by:

  • Promoting Homeownership: By providing affordable mortgage loans, thrifts help individuals and families achieve homeownership, which is a key component of financial stability and wealth building.
  • Encouraging Savings: Thrifts encourage individuals to save money by offering savings accounts with competitive interest rates. This helps build financial security and provides funds for future needs.
  • Supporting Local Economies: Thrifts often focus on serving local communities, providing essential financial services to residents and small businesses, and contributing to the economic development of the areas they serve.

Regulatory framework for thrifts

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Thrifts operate under specific regulatory frameworks to ensure their safety and soundness:

  • Federal Regulation: In the United States, thrifts are regulated by various federal agencies, including the Office of the Comptroller of the Currency (OCC) for savings and loan associations and savings banks, and the National Credit Union Administration (NCUA) for credit unions.
  • State Regulation: Many thrifts are also subject to state regulation, depending on their charter and the state in which they operate.
  • Deposit Insurance: Deposits at thrifts are typically insured by federal agencies, such as the Federal Deposit Insurance Corporation (FDIC) for savings and loan associations and savings banks, and the National Credit Union Share Insurance Fund (NCUSIF) for credit unions.

Challenges faced by thrifts

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While thrifts provide valuable services, they also face several challenges:

  • Interest Rate Risk: Thrifts are particularly vulnerable to interest rate fluctuations, which can impact their ability to offer competitive mortgage rates and maintain profitability.
  • Regulatory Changes: Changes in regulations can affect the operations and profitability of thrifts, requiring them to adapt to new requirements and standards.
  • Competition: Thrifts face competition from other financial institutions, including commercial banks and online lenders, which can impact their market share and customer base.

Examples of thrifts

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Several well-known thrift institutions operate in the financial system:

  • Savings and Loan Associations: Historically prominent S&Ls include Washington Mutual and IndyMac Bank. However, many S&Ls have been acquired by larger banks or restructured following the savings and loan crisis of the 1980s and 1990s.
  • Savings Banks: Examples of savings banks include New York Community Bank and People’s United Bank, which offer a range of financial services in addition to traditional savings and mortgage products.
  • Credit Unions: Prominent credit unions include Navy Federal Credit Union and State Employees’ Credit Union, both of which provide a wide range of financial services to their members.

Thrifts are essential financial institutions that promote savings, homeownership, and community development. By understanding their functions, types, and regulatory frameworks, individuals can better appreciate the role thrifts play in the financial system and their contributions to economic stability and growth.


Sources & references

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