Chapter 19
Savings Associations and Credit Unions
◼ Multiple Choice Questions
1. Savings banks
(a) were first established in Scotland and England.
(b) were established to encourage saving by the poor.
(c) were very conservative with their funds, placing most of them in commercial banks.
(d) all of the above.
(e) only (a) and (b) of the above.
2. Which of the following statements about mutual savings banks are true?
(a) There are currently under 200 mutual savings banks in the United States.
(b) Most mutual savings banks are federally-chartered.
(c) Both (a) and (b).
(d) None of the above.
3. Which of the following statements concerning the mutual form of ownership of savings banks
are true?
(a) The mutual form of ownership accentuates the principal-agent problem that exists in
corporations.
(b) More capital is available, contributing to the safety of mutual savings banks compared to other
banking organizations.
(c) Managers of mutual savings banks are more risk averse than in the corporate form, because the
value of their ownership does not increase if the firm does well.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
4. Savings and loan associations
(a) were established by Congress to encourage home ownership.
(b) initially were not permitted to accept demand deposits.
(c) held about 85 percent of their assets in the form of mortgages prior to the Great Depression.
(d) all of the above.
(e) only (a) and (b) of the above.
246 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
5. Savings and loans associations
(a) initially were allowed to attract funds by offering savings accounts that paid a slightly higher
interest rate than that offered by commercial banks.
(b) held about 85 percent of their total assets as mortgages prior to the Great Depression.
(c) did not weather the Great Depression well, as thousands of S&Ls failed in the 1930s.
(d) all of the above.
(e) only (a) and (b) of the above.
6. Thrifts
(a) fueled the home-building boom from 1934–1978.
(b) suffered in the 1970s as inflation rose above deposit interest rate ceilings.
(c) have grown in importance in attracting deposits relative to commercial banks since 1980.
(d) all of the above.
(e) only (a) and (b) of the above.
7. Thrifts suffered problems in the 1970s as
(a) market interest rates rose above the rates thrifts could pay on deposits and savings accounts.
(b) thrift customers moved their funds from thrifts to money market mutual funds.
(c) government regulators severely limited the scope of activities that thrifts could undertake to
grow their way out of trouble.
(d) all of the above occurred.
(e) only (a) and (b) of the above occurred.
8. In the early stages of the 1980s banking crisis, financial institutions were especially hurt by
(a) the sharp increases in interest rates from late 1979 until 1981.
(b) the severe recession in 1981–82.
(c) the sharp decline in the price level from mid-1980 to early 1983.
(d) all of the above.
(e) only (a) and (b) of the above.
9. In the early stages of the 1980s banking crisis, financial institutions were especially harmed by
(a) declining interest rates from late 1979 until 1981.
(b) the severe recession in 1981–82.
(c) the disinflation from mid-1980 to early 1983.
(d) all of the above.
Chapter 19 Savings Associations and Credit Unions 247
10. Savings and loans lost a total of $10 billion in 1981–1982 due to a combination of rising interest
rates in 1979–1981 and
(a) the recession of 1981–1982 that reduced real estate prices enough to cause significant loan
defaults.
(b) the regulatory restrictions enacted by Congress in 1981 and 1982.
(c) the loss of market share to commercial banks that were allowed to compete directly with thrifts
in the real estate market.
(d) the acceleration of inflation in 1981–1982 that caused thrifts to lose additional funds to money
market mutual funds.
11. In the 1980s, thrift institutions, which had been almost entirely restricted to making loans for home
mortgages only, were allowed by regulators to
(a) finance acquisitions in commercial real estate.
(b) extend consumer loans.
(c) purchase junk bonds.
(d) do all of the above.
(e) do only (a) and (b) of the above.
12. The government granted thrifts greater powers in the early 1980s in hopes of turning the industry’s
problems around. These powers
(a) required greater expertise in managing risk than many thrift managers possessed.
(b) encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk.
(c) expanded the scope and complexity of thrift lending activities that went beyond what regulators
could effectively monitor, given their limited resources.
(d) did all of the above.
(e) did only (a) and (b) of the above.
13. When nearly half of the S&Ls in the United States had a negative net worth and were thus insolvent
by the end of 1982, regulators adopted a policy of _________, which amounted to _________
capital requirements.
(a) regulatory forbearance; raising
(b) regulatory forbearance; lowering
(c) regulatory stringency; raising
(d) regulatory stringency; lowering
14. The policy of _________ exacerbated _________ problems as savings and loans took on
increasingly huge levels of risk on the slim chance of returning to solvency.
(a) regulatory forbearance; moral hazard
(b) regulatory forbearance; adverse selection
(c) regulatory stringency; moral hazard
(d) regulatory stringency; adverse selection
248 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
15. Which of the following reasons explain why federal regulators adopted a policy of regulatory
forbearance toward insolvent financial institutions in the early 1980s?
(a) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls.
(b) The regulators were reluctant to close the firms that justified their regulatory existence.
(c) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in
over their heads with problems.
(d) All of the above.
(e) Only (a) and (b) of the above.
16. The policy of regulatory forbearance
(a) meant delaying the closing of “zombie S&Ls” as their losses mounted during the 1980s.
(b) benefited “zombie S&Ls” at the expense of healthy S&Ls, as healthy institutions lost deposits to
insolvent institutions.
(c) contributed to declining profitability in the S&L industry and an increase in the number of
“zombie S&Ls.”
(d) all of the above.
(e) only (a) and (b) of the above.
17. The policy of regulatory forbearance
(a) meant delaying the closing of “zombie S&Ls” as their losses mounted during the 1980s.
(b) benefited “zombie S&Ls” at the expense of healthy S&Ls, as healthy institutions lost deposits to
insolvent institutions.
(c) had the advantage of benefiting healthy S&Ls by giving them the opportunity to attract deposits
that began to leave the “zombie S&Ls.”
(d) both (a) and (b) of the above.
(e) both (a) and (c) of the above.
18. Which of the following are reasons that explain why regulators pursued a policy of regulatory
forbearance toward thrifts in the early 1980s?
(a) Regulators knew that the FSLIC did not have sufficient funds to close insolvent S&Ls and pay
off their depositors.
(b) Regulators were probably too close to the people they were supposed to be regulating to close
down thrifts and put them out of business.
(c) Regulators preferred to sweep the problems that thrifts were suffering under the rug in the hope
that they would go away as the economy improved.
(d) All of the above explain regulatory forbearance.
(e) Only (a) and (b) of the above explain regulatory forbearance.
Chapter 19 Savings Associations and Credit Unions 249
19. Examples of the huge risks that “zombie S&Ls” undertook include
(a) building shopping centers in the desert.
(b) buying manufacturing plants to convert manure to methane.
(c) purchasing billions of dollars of junk bonds.
(d) all of the above.
(e) only (a) and (b) of the above.
20. “Zombie S&Ls”
(a) paid above market interest rates to attract deposits to fuel their lending boom.
(b) offered loans at below market interest rates to expand their lending.
(c) drove down the profitability of solvent S&Ls, threatening to turn them into “zombies” too.
(d) did all of the above.
(e) did only (a) and (b) of the above.
21. According to the text, the Competitive Equality in Banking Act of 1987
(a) turned the thrift industry around by providing the necessary funds to close the “zombie S&Ls.”
(b) lowered the cost of bailing out the S&Ls by quickly closing “zombie S&Ls” before they could
cause other thrifts to fail.
(c) failed to provide the funds necessary to close ailing S&Ls, and actually encouraged regulators to
continue to pursue regulatory forbearance.
(d) did both (a) and (b) of the above.
22. The Competitive Equality in Banking Act of 1987
(a) discouraged regulators from pursuing regulatory forbearance.
(b) directed regulators to close “zombie S&Ls” as quickly as administratively possible.
(c) encouraged regulators to continue their policy of regulatory forbearance.
(d) did both (a) and (b) of the above.
23. The Competitive Equality in Banking Act of 1987
(a) provided insufficient funds to the FSLIC to close down insolvent S&Ls.
(b) actually directed S&L regulators to continue to pursue regulatory forbearance, further delaying
the closing of insolvent S&Ls.
(c) created a new agency, the Resolution Trust Corporation, to manage insolvent thrifts.
(d) did all of the above.
(e) did only (a) and (b) of the above.
250 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
24. The major provisions of the Competitive Equality in Banking Act of 1987 included
(a) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
(b) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in
conservatorship or receivership.
(c) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.
(d) all of the above.
(e) only (a) and (b) of the above.
25. The major provisions of the Competitive Equality in Banking Act of 1987 included
(a) abolishing the Federal Home Loan Bank Board and the FSLIC.
(b) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
(c) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in
conservatorship or receivership.
(d) all of the above.
(e) none of the above.
26. An analysis of the political economy of the savings and loan crisis helps one to understand
(a) why politicians hampered the efforts of thrift regulators, cutting regulatory appropriations and
encouraging regulatory forbearance.
(b) why thrift regulators were reluctant to admit that any problem even existed in the thrift industry.
(c) why thrift regulators willingly acceded to pressures placed upon them by members of Congress.
(d) all of the above.
(e) only (a) and (b) of the above.
27. An analysis of the political economy of the savings and loan crisis helps one to understand
(a) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and
encouraging closing of insolvent thrifts.
(b) why thrift regulators were quick to inform Congress of the problems that existed in the thrift
industry.
(c) why thrift regulators willingly acceded to pressures placed upon them by members of Congress.
(d) all of the above.
Chapter 19 Savings Associations and Credit Unions 251
28. The political economy of the S&L crisis shows that the principal-agent problem occurs in politics. In
this instance, the agent-regulators did not act to protect the principal-taxpayers because
(a) regulators wanted to escape blame, hoping the situation would improve before others discovered
the problem.
(b) regulators responded to pressure to pursue regulatory forbearance from politicians who had
accepted campaign donations from owners of S&Ls.
(c) Congress was unwilling to allocate the necessary funds regulators needed to close insolvent
S&Ls.
(d) all of the above.
(e) only (a) and (b) of the above.
29. That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor
performance is explained by
(a) regulators’ desire to escape blame for poor performance, leading to a perverse strategy of
“regulatory gambling.”
(b) regulators’ incentives to accede to pressures imposed by politicians, who sought to keep
regulators from imposing tough regulations on institutions that were major campaign
contributors.
(c) Congress’s unwillingness to appropriate sufficient funds to permit regulators to examine the
many thrift institutions that needed monitoring.
(d) all of the above.
(e) only (a) and (b) of the above.
30. That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor
performance cannot be explained by
(a) regulators’ desire to escape blame for poor performance, leading to a perverse strategy of
“regulatory gambling.”
(b) regulators’ incentives to accede to pressures imposed by politicians, who sought to keep
regulators from imposing tough regulations on institutions that were major campaign
contributors.
(c) Congress’s dogged determination to protect taxpayers from the unsound banking practices of
managers at many of the nation’s savings and loans.
(d) any of the above.
31. That several hundred S&Ls were not even examined once in the period January 1984 through June
1986 can be explained by
(a) Congress’s unwillingness to allocate the necessary funds to thrift regulators.
(b) regulators’ reluctance to find the specific problem thrifts that they knew existed.
(c) prohibitions against onerous regulatory restrictions against S&Ls as mandated in the
Competitive Equality in Banking Act.
(d) all of the above.
(e) only (a) and (b) of the above.
252 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
32. “Bureaucratic gambling” refers to
(a) the belief of thrift managers that they would not be audited by thrift regulators in the 1980s due
to the relatively weak bureaucratic power of the regulators.
(b) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early
1980s.
(c) the strategy adopted by thrift regulators of lowering capital requirements and pursuing
regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would
improve.
(d) none of the above.
33. Charles Keating
(a) was allowed to acquire Lincoln Savings and Loan of Irvine, California, even though he had been
accused of fraud by the SEC only four and a half years earlier.
(b) fired Lincoln’s conservative lending officers and internal auditors, even though he had promised
regulators he would keep them.
(c) enlisted the help of five senators to delay the seizure of Lincoln’s assets.
(d) did all of the above.
34. Examiners from the Federal Home Loan Bank Board of San Francisco recommended that Lincoln
Savings and Loan be seized when they discovered that
(a) officials at the thrift had attempted to mislead them.
(b) it had exceeded the 10 percent limit on equity investments by $600 million.
(c) its owner, Charles Keating, had been convicted of embezzlement ten years before he purchased
the thrift.
(d) all of the above.
(e) both (a) and (b) of the above.
35. The bailout of the savings and loan industry was much delayed and, therefore, much more costly to
taxpayers because
(a) of regulators’ initial attempts to downplay the seriousness of problems within the thrift industry.
(b) politicians who received generous campaign contributions from the savings and loan industry,
like regulators, hoped that the problems in the industry would ease over time.
(c) Congress encouraged, and thrift regulators acceded to, a policy of regulatory forbearance.
(d) all of the above.
(e) only (a) and (b) of the above.
Chapter 19 Savings Associations and Credit Unions 253
36. The bailout of the savings and loan industry was much delayed and, therefore, much more costly to
taxpayers because
(a) regulators initially attempted to downplay the seriousness of problems within the thrift industry.
(b) politicians who received generous campaign contributions from the savings and loan industry
hoped that the problems in the industry would ease over time.
(c) Congress did not wait long enough for many of the problems in the thrift industry to correct
themselves.
(d) all of the above.
(e) only (a) and (b) of the above.
37. Prior to August 1989, the agency that regulated the nation’s savings and loan associations was the
(a) Federal Home Loan Bank Board.
(b) Office of Thrift Supervision.
(c) Resolution Trust Corporation.
(d) Comptroller of the Currency.
38. The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks,
were abolished by the
(a) Competitive Equality in Banking Act of 1987.
(b) Financial Institutions Reform, Recovery and Enforcement Act of 1989.
(c) Office of Thrift Supervision.
(d) Office of the Comptroller of the Currency.
39. The major provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
included
(a) abolishing the Federal Home Loan Bank Board and the FSLIC.
(b) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
(c) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
(d) all of the above.
(e) only (a) and (b) of the above.
40. The major provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
included
(a) abolishing the Federal Home Loan Bank Board and the FSLIC.
(b) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
(c) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in
conservatorship or receivership.
(d) all of the above.
(e) only (a) and (b) of the above.
254 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
41. The major provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
included
(a) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift
Supervision, a bureau within the U.S. Treasury Department.
(b) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
(c) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in
conservatorship or receivership.
(d) all of the above.
(e) only (a) and (b) of the above.
42. The major provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
included
(a) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal
deposit insurance system.
(b) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in
conservatorship or receivership.
(c) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.
(d) all of the above.
(e) only (a) and (b) of the above.
43. The major provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
included
(a) reducing the regulatory responsibilities of the FDIC.
(b) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in
conservatorship or receivership.
(c) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.
(d) all of the above.
(e) only (a) and (b) of the above.
44. To replenish the reserves of the Savings Association Insurance Fund, insurance premiums for S&Ls
were increase from _________ cents per $100 of deposits to _________ cents and can rise as high
as 32.5 cents.
(a) 12.5; 17.5
(b) 17.5; 20.5
(c) 20.8; 23.0
(d) 23.0; 27.8
45. Since 1993, the number of savings and loan associations has
(a) held steady.
(b) risen sharply.
(c) risen slightly.
(d) declined substantially.
Chapter 19 Savings Associations and Credit Unions 255
46. The largest asset held by S&Ls is
(a) consumer loans.
(b) securities.
(c) mortgage loans.
(d) consumer savings.
47. (I) S&Ls’ net worth ratio is about the same as that of commercial banks. (II) Goodwill accounts for
a majority of S&Ls’ capital.
(a) (I) is true, (II) false.
(b) (I) is false, (II) true.
(c) Both are true.
(d) Both are false.
48. Since the early 1990s, the number of savings and loan associations has _________ and the average
size (in assets) has _________.
(a) risen; declined
(b) declined; risen
(c) risen; risen
(d) declined; declined
49. The main source of funds at savings and loan associations is
(a) borrowing in the money market.
(b) borrowing in the capital market.
(c) deposits.
(d) equity capital.
50. Since the early 1990s, the net income of savings and loan associations has
(a) risen.
(b) fallen slightly.
(c) fallen sharply.
(d) held steady.
51. Credit unions are characterized by
(a) mutual ownership.
(b) common bond membership.
(c) nonprofit, tax-exempt status.
(d) all of the above.
(e) none of the above.
256 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
52. The common bond membership requirement makes it difficult for _________ to diversify their
loans.
(a) savings and loan associations
(b) credit unions
(c) banks
(d) mutual savings banks
53. The smallest average-size depository institution is
(a) credit unions.
(b) savings and loan associations.
(c) commercial banks.
(d) money market mutual funds.
54. Which of the following is a lender of last resort for credit unions?
(a) National Credit Union Administration
(b) U.S. Central Credit Union
(c) State central credit unions
(d) The Central Liquidity Facility
55. The day-to-day liquidity needs of credit unions are met by
(a) National Credit Union Administration.
(b) Federal Reserve System.
(c) State central credit unions.
(d) The Central Liquidity Facility.
56. Since 1980 the number of credit unions has
(a) declined substantially.
(b) remained steady.
(c) increased substantially.
(d) increased slightly.
57. Since 1990 the number of credit union members has
(a) increased substantially.
(b) increased slightly.
(c) decreased substantially.
(d) decreased slightly.
Chapter 19 Savings Associations and Credit Unions 257
58. Credit unions’ main source of funds is
(a) regular share accounts.
(b) share certificates.
(c) share draft accounts.
(d) money market accounts.
59. Credit unions’ main type of loans is
(a) mortgages.
(b) automobile.
(c) credit cards.
(d) nonresidential real estate.
258 Mishkin/Eakins • Financial Markets and Institutions, Fifth Edition
◼ True/False
1. The mutual form of ownership accentuates the principal-agent problem that exists in corporations.
2. Savings and loans are not as heavily concentrated in mortgages and have had more flexibility in
their investing practices than mutual savings banks.
3. The congressionally imposed cap on the interest rate that S&Ls could pay on savings accounts
became a serious problem for them in the 1970s when inflation rose.
4. Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take
fewer risks than healthy S&Ls that can take risks and still remain solvent.
5. The Competitive Equality in Banking Act of 1987 allowed the FSLIC to borrow all the funds it
needed to close insolvent S&Ls and pay off depositors.
6. In the 1980s, regulators engaged in bureaucratic gambling when they allowed insolvent S&Ls to
continue operating.
7. FIRREA imposed new restrictions on thrift activities that, in essence, re-regulated the S&L industry
to the asset choices it had before 1982.
8. Most credit unions today have federal charters.
9. Credit unions are owned by stockholders.
10. Federal legislation allows credit unions representing groups with different common bonds to merge
into a single credit union.
11. Credit unions view commercial banks as government-supported and hence unfair competitors due to
their tax advantages.
12. Mutual savings banks are the only financial institutions that are tax-exempt.
Chapter 19 Savings Associations and Credit Unions 259
◼ Essay
1. What factors contributed to creating the thrift crisis?
2. Explain why thrift regulators engaged in regulatory forbearance in the 1980s.
3. Explain how the Lincoln Savings and Loan scandal is an application of the principal-agent problem.
4. Why did the Competitive Equality in Banking Act of 1987 fail to solve the problems in the thrift
industry?
5. How has the thrift industry been transformed since FIRREA?
6. Why have commercial banks gone to court in an effort to limit the activities of credit unions?