If you are used to watching “It’s a Wonderful Life” as part of your holiday traditions, you may recall the Bailey Bros. Building & Loan Association and how it helped finance numerous single-family homes in the town of Bedford Falls.
Although they are not as prevalent as before, savings and loan associations, also known as “thrifts,” continue to hold significance in the financial lives of many Americans.
According to Tanya Marsh, a law professor at Wake Forest University in North Carolina, thrifts differ from conventional banks in that they primarily serve US consumers instead of businesses. This is due to a legal requirement stating that thrifts must allocate 65 percent of their lending portfolio to consumer loans.
What thrifts do
According to Marsh, there are not many noticeable differences between a thrift and a community bank for the average consumer. Both are usually smaller, local institutions and lack the reach and resources of larger national banks such as Chase or Bank of America.
Thrifts provide similar deposit and credit services as banks, including checking and savings accounts, certificates of deposit, home and auto loans, and credit cards. Moreover, like banks, the Federal Deposit Insurance Corp assures full protection of all deposits up to $250,000 under the U.S. government’s full faith and credit.
Comparing it to banks, thrifts offer higher interest rates on savings accounts. This is because thrifts can borrow money from the Federal Home Loan Banks at a lower rate, resulting in higher interest rates for their customers’ savings accounts. It has been a traditional benefit of thrifts from a consumer perspective.
What thrifts don’t do
According to Brett Rabatin, CFA, an analyst and managing director at the Hovde Group, thrifts usually do not provide a comprehensive range of financial services similar to what banks offer. This is what sets them apart from banks.
Rabatin explains that the products offered at a savings and loan or thrift branch are much less complex than those at a commercial bank.
This means that a digital bank may offer fewer account options and limited wealth management, foreign exchange, and insurance services when compared to a traditional bank.
History of thrifts
Thrifts, which originated as “building societies” in the late 18th century in the United Kingdom, have a long history and have also been established in the United States.
According to Chris Cole, Executive Vice President and Senior Regulatory Counsel of the Independent Community Bankers of America, thrift charters date back to before the Civil War.
The portrayal of savings institutions in the classic film “It’s a Wonderful Life” is somewhat true to life. These institutions, whether they were customer-owned mutuals or owned by shareholders, primarily provided mortgages to enable middle-class individuals to purchase single-family homes in the United States.
According to Cole, during the postwar era, a majority of Americans obtained home loans from thrifts and at one point, these thrifts were responsible for issuing the majority of mortgages in the United States.
The financial services industry underwent deregulation, which led to a series of failures in the 1980s that devastated thrifts. In order to recover their losses, thrifts resorted to investing in high-risk projects. Eventually, the Federal Reserve reported that the government had to shut down 747 insolvent thrifts.
According to Wake Forest’s Marsh, the thrift industry still hasn’t rebounded since the S&L crisis that took place decades ago. Currently, there are only around 600 thrifts in the United States, as reported by market researcher IBISWorld. This is a substantial decrease compared to the approximately 4,000 thrifts in 1980.
Thrifts may be harder to find in the future
According to Rabatin from Hovde Group, thrifts and conventional banks are becoming increasingly similar. Savings and loan associations are now offering more commercial lending and construction services, and more of them are switching to become conventional banks.
According to Marsh, starting a thrift store today may not be beneficial since the industry is rapidly consolidating. Although some local institutions may survive due to customer loyalty, it is becoming increasingly difficult for new thrift stores to succeed.
Bottom line
Thrifts and conventional banks provide comparable deposit and credit services, but thrifts focus on serving individuals rather than businesses. One possible benefit of thrifts is that they provide better savings account interest rates. Nevertheless, thrifts usually offer fewer financial services and are becoming scarce due to their consolidation after many closures in the 1980s.