Thrift banks are financial institutions that have a primary focus on taking deposits and originating home mortgages.
One major factor that differentiates thrift banks from larger commercial banks such as Wells Fargo or Bank of America is that thrifts generally have access to low-cost funding from Federal Home Loan Banks, which enables them to offer customers higher savings account yields. Thrifts also have greater liquidity for making home mortgage loans.
Thrift banks are also known as savings and loan associations. They are smaller than major retail or commercial banks, and more community-focused. In practice, this means that thrifts place a greater emphasis on serving their customers, compared with major banking institutions that are more focused on providing returns for shareholders. In addition to traditional savings accounts and home loan origination, thrift banks frequently offer checking accounts and other basic banking services, such as personal loans, auto loans and credit cards.
The thrift banking system, which began with the establishment of building societies in the United Kingdom in the 18th century, was created in order to shift mortgage loan origination away from insurance companies and into banking institutions. Thrifts represent a consumer-oriented reaction against a situation in which many mortgages took the form of interest-only loans that homeowners were often forced to default on when huge, unaffordable balloon payments came due at the end of the loan term.
The Structure and Purpose of Thrift Banks
Thrift banks are structured either as corporate entities owned by shareholders, or as mutual associations owned by their customers, both borrowers and depositors.
Interestingly, the depiction of a savings and loan association in the classic movie It’s a Wonderful Life, is a reasonably accurate representation of a thrift bank, as it shows that the primary purpose for which thrifts were created is to facilitate financing of single-family homes for regular, working-class individuals or families. Thrift banks are required by law to commit 65% or more of their loan portfolio to loans to consumers rather than to businesses. This is one of the main points that distinguish thrifts from major commercial banks.
Thrifts were created to serve as local, basic-service banking institutions. They do not typically offer the same range of financial services available from major money center banks, such as brokerage and investment services, wealth management and insurance products.
The primary bonus that thrift banks can offer to attract customers is higher interest rate returns on savings accounts and certificates of deposit (CDs), thanks to their ability to draw less expensive capital from Federal Home Loan Banks.
The Future of Thrifts
Following the savings and loan crisis in the 1980s, when many thrifts failed, there have been structural changes in thrift banks that have blurred some of the differences between thrifts and conventional banks. The Dodd-Frank Act eliminated key advantages of thrifts, such as the less stringent regulation than that applied to major banking firms.
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