Chapter 26
On the Web: Savings Associations and
Credit Unions
Mutual Savings Banks
Savings and Loan Associations
Mutual Savings Banks and Savings and Loans Compared
Savings and Loans in Trouble: The Thrift Crisis
Later Stages of the Crisis: Regulatory Forbearance
Competitive Equality in Banking Act of 1987
Political Economy of the Savings and Loan Crisis
Principal–Agent Problem for Regulators and Politicians
Case: Principal–Agent Problem in Action: Charles Keating and the Lincoln Savings
and Loan Scandal
Savings and Loan Bailout: Financial Institutions Reform, Recovery, and Enforcement Act of 1989
The Savings and Loan Industry Today
Number of Institutions
S&L Size
S&L Assets
S&L Liabilities and Net Worth
Capital
Profitability and Health
The Future of the Savings and Loan Industry
Credit Unions
History and Organization
Sources of Funds
Uses of Funds
Advantages and Disadvantages of Credit Unions
The Future of Credit Unions
◼ Overview and Teaching Tips
This chapter explores thrift institutions, which provide financial services to individuals and households.
A brief history of mutual savings banks and savings and loan associations is given in the first two sections
of this chapter. Students get a clear background of the history that shaped the foundation of these institutions.
One main difference between the two is the ownership structure. The chapter concentrates more on savings
and loans. It discusses the early crises of the S&Ls, which caused turmoil for millions of people with
156 Mishkin/Eakins • Financial Markets and Institutions, Eighth Edition
money in these institutions. For an excellent example of the nature of the S&L crisis, refer students to
the case dealing with Charles Keating and the Lincoln Savings and Loan Scandal.
In 1989, the Bush Administration bailed out the failing Savings and Loans. New restrictions were imposed
on thrift institutions so this problem would not occur again. The S&L industry today has a smaller number
of institutions since many merged or failed. Many of the loans are now secured by real estate to insure
repayment. What lies ahead for S&Ls are gradual changes in the industry to overlap their services with
commercial banks.
Another type of thrift institution is the credit union which lends and provides services to its members who
are consumers, not businesses. A description of the history of credit unions and its membership is in this
section. Credit unions won over employers by offering their employees banking facilities closer to their
place of work. Common bond membership is a major feature that distinguishes credit unions from other
financial institutions. The idea means that only members of a particular occupation, organization, or
association are permitted to join the credit union. This type of membership does limit credit unions from
diversifying their risks. Since credit unions are nonprofit and tax exempt, they can offer lower fees for
services than banks usually would offer customers. Most of the money in credit unions comes directly
from customer savings and share draft accounts. The advantages of credit unions outweigh the
disadvantages, as demonstrated by their growth and popularity.
◼ Answers to End-of-Chapter Questions
1. All of the depositors at a mutual bank are owners of the firm. Instead of receiving interest payments,
they receive dividend income.
3. The primary assets of S&Ls are loans, for the most part mortgage loans.
5. Because depositors were insured by the government against losses, they had no incentive to monitor
bank management.
7. The net worth ratio is the most common measure of capital adequacy.
9. Credit unions are mandated to provide financial services to consumers rather than corporate
customers.
11. Only people living in a certain geographic area or employed in a specific business or by a particular
