Answers to Chapter 14
Questions:
1. A comparison of Table 11-1 with Table 14-1 reveals that unlike banks, savings institutions hold the vast majority
of their assets in the form of mortgages and mortgage backed securities. Like banks, the liabilities of savings
2. In the mid-1980s, real estate and land prices in Texas and the Southwest collapsed. This
was followed by economic downturns in the Northeast and Western states of the United
States. Many borrowers with mortgage loans issued by savings institutions in these areas
3. In the 1980s, the large number of savings institution failures depleted the resources of the
Federal Savings and Loan Insurance Corporation (FSLIC) to such an extent that by 1989 it
was massively insolvent. For example, between 1980 and 1988, 514 savings institutions
failed, at an estimated cost of $42.3 billion. Moreover, between 1989 and 1992 an additional
734 savings institutions failed, at a cost of $78 billion. As a result, Congress passed the
4. Table 14-1 shows the balance sheet of savings institutions in 2013. On this balance sheet, mortgages and
mortgage-backed securities (securitized pools of mortgages) represent 65.01 percent of total assets. Figure 14-2
shows the distribution of mortgage related assets for savings institutions as of 2010. As noted earlier, the FIRREA
uses the QTL test to establish a minimum holding of 65 percent in mortgage-related assets for savings institutions.
7. Like the commercial banking industry, savings institutions experienced record profits in the mid- to late 1990s as
interest rates (and thus the cost of funds to savings institutions) remained low and the U.S. economy (and thus the
demand for loans) prospered. The result was an increase in the spread between interest income and interest expense
for savings institutions and consequently an increase in net income. In 1999, savings institutions reported $10.7
billion in net income and an annualized ROA of 1.00 percent. Only the $10.8 billion of net income reported in 1998
exceeded these results. Asset quality improvements were widespread during 1999, providing the most favorable net
9. Credit unions (CUs) are nonpro?t depository institutions mutually organized and owned by
their members (depositors). They were established in the United States in the early 1900s as
self–help organizations. The ?rst credit unions were organized in the Northeast, initially in
10. Credit unions did not suffer the same fate as the savings institutions because their portfolios were much more
conservative than those of savings associations and savings banks; they specialize in making short-term consumer
11. The nation’s credit union system consists of three distinct tiers: the top tier at the
national level (U.S. Central Credit Union); the middle tier at the state or regional level
(corporate credit unions); and the bottom tier at the local level (credit unions). Corporate
credit unions are ?nancial institutions that are cooperatively owned by their member credit
12. As of June 2013, 6,906 credit unions had assets of $1,056.0 billion. Individually, credit
unions tend to be very small, with an average asset size of $152.9 million in 2013, compared
to $2,209.4 million for banks. The total assets of all credit unions are smaller than the
13. Over 25 percent of CU assets are in the form of small consumer loans. Total loans, however, comprised 57.4
percent of total assets in 2013. Figure 14-5 illustrates the composition of the loan portfolio for all CUs. As
mentioned in the Chapters’ introduction, CUs concentrate mainly on servicing the financial needs of its members
-mainly individual consumers. Accordingly, 75.9 percent of the loan portfolio consists of first mortgages and (new
and used) vehicle loans.
14. Like savings institutions, credit unions can be federally or state chartered. Approximately two-thirds of credit
15. As CUs have expanded in number, size, and services, bankers claim that CUs unfairly compete with small banks
that have historically been the major lender in small towns. In 1997, the banking industry filed two lawsuits in its
push to narrow the widening membership rules governing credit unions. The first lawsuit challenged an
occupation-based credit union=s ability to accept members from companies unrelated to the firm that originally
sponsored the credit union. In the second lawsuit, the American Bankers Association asked the courts to bar the
federal government from allowing occupation-based credit unions to convert to community-based charters. Bankers
argued in both lawsuits that such actions, broadening the membership of credit unions along other than
16. In another hit to commercial banks, credit unions saw record increases in membership in late 2011 and early
2012, most of the increase coming from commercial bank customers. For the year ending June 30, 2012 credit union
membership increased by nearly 2.2 million new members: almost twice the 1.2 million average annual growth
17. Like other depository institutions, local credit unions have grown in asset size in the 1990s and 2000s. Asset
growth from 1999 to 2013 was more than 7.5 percent. In addition, CU membership increased from 77.5 million to
95.2 million over the 1999-2013 period. Asset growth was especially pronounced among the largest CUs (with
18. While local credit unions as a whole survived the financial crisis more profitably than commercial banks and
savings institutions, corporate credit unions did not. As mentioned earlier, corporate credit unions serve their
members by investing and lending excess funds that member credit unions place with them. Like commercial banks,
in the early and mid-2000s, corporate credit unions faced increasingly tough business conditions that strained their
19. The three types of finance companies are (1) sales finance institutions, (2) personal credit institutions, and (3)
20. A comparison of Table 14-4 with Table 11-1 shows that finance companies hold relatively more equity, 13.3
21. Business and consumer loans (called accounts receivable) are major assets held by finance companies; in 2013
they represented 69.8 percent of total assets. In 2013, consumer loans constituted 59.75 percent of all finance
23. Presumably because finance companies generally attract a riskier class of customers than do banks. In the late
24. First, finance companies are not subject to regulations that restrict the types of products and services they can
26. Since the Tax Reform Act of 1986, only home equity loans offer tax deductible interest for the borrower. Hence