What Is a Thrift Bank?
Let me explain what a thrift bank is—it's a financial institution that focuses on providing savings accounts and originating home mortgages for consumers like you. You might also hear them called thrifts or Savings and Loan Associations (S&Ls). Unlike bigger commercial banks such as Wells Fargo or Bank of America, thrifts typically give you higher yields on your savings and stick to limited lending for businesses.
At their core, thrifts offer traditional savings accounts and home loans, but they also provide checking accounts, personal and car loans, and credit cards. Their main priority, though, is financing single-family homes. These institutions can be corporate entities owned by shareholders or mutually owned by their borrowers and depositors.
Key Takeaways
- A thrift bank, or Savings and Loan Association (S&L), specializes in savings accounts and home mortgages for consumers.
- Beyond core offerings, thrifts provide checking accounts, personal and car loans, and credit cards.
- Since the 1986-1995 Savings and Loan Crisis, structural changes have blurred distinctions between thrifts and conventional banks.
History of Thrift Banks
The concept of thrift institutions started with customer-owned building societies in the United Kingdom in the early 18th century. In the U.S., this evolved into Savings and Loan Associations (S&Ls), primarily to enhance the mortgage market.
Early in the 20th century, U.S. mortgages were typically five-to-10-year interest-only loans ending in large balloon payments, leading to frequent defaults, especially during the Great Depression with rising unemployment.
In 1932, President Herbert Hoover enacted the Federal Home Loan Bank Act to promote homeownership by supplying low-cost funds for mortgages. This was the start of legislation making homeownership more attainable for Americans in the first half of the century. The act also established the Federal Home Loan Bank Board to develop a secondary mortgage market and create S&Ls for issuing those loans.
The Impact of Thrift Banks
Thrift banks, along with the Veterans Administration's 1944 mortgage insurance program, greatly enabled home purchases after World War II. Many veterans and their families bought suburban homes thanks to these initiatives.
During the 1960s and 1970s, most mortgages came from thrifts and S&Ls, contributing to a sharp rise in U.S. homeownership rates from 1940 to 1980 through these and other federal programs.
By law, thrifts can dedicate no more than 20% of their business to commercial loans. The 1986-1995 Savings and Loan Crisis saw many failures due to poor lending practices. Since then, changes like the 1989 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the 2010 Dodd-Frank Act have reduced some thrift advantages, such as lighter regulations, but their commitment to consumers persists, with residential mortgage loans remaining their key purpose.
What Are Some Types of Thrift Banks?
Thrift banks encompass savings banks, private development banks, and stock savings and loan associations.
What Is the Difference Between Thrift Banks and Commercial Banks?
Thrift banks function much like traditional banks but are geared toward consumers rather than businesses. They focus on consumer accounts and loans, while commercial banks serve businesses too. Thrifts are usually smaller and local, lacking the nationwide reach of large banks, though they're increasingly offering similar services, reducing the differences.
What Are Mutual Savings Banks?
Many thrift banks are mutual savings banks, where account holders are also shareholders. This setup resembles credit unions, but mutual banks are for-profit, unlike nonprofit credit unions.
The Bottom Line
In the U.S., the main depository institutions are commercial banks, thrift banks, and credit unions. Thrift banks, or S&Ls, rely on consumer deposits and specialize in savings accounts and home mortgages. They also offer services like debit and credit cards, plus savings and checking accounts, much like commercial banks.
