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