The Role of Non- Commercial Banks in the Financial System

1. Introduction

Thrift institutions are money related delegates that give a similar fundamental keeping money benefits as customary banks (financial records, investment accounts, credits), yet which were initially made to fill explicit keeping money specialties. The three most common thrift establishments are credit associations, investment funds and advance affiliations, and common investment funds banks.

Non-commercial financial institutions includes: savings and loans, pawnshops, credit unions, private banks, mutual credit societies, insurance companies, pension funds, finance companies and other types of activity.  These institutions originally were created was with the purpose to accept deposits and use much of the funds for mortgage loans, home equity loans and mortgage backed securities. (Madura)

The special role of thrift organizations in the complex financial structure of the United States regularly is misjudged. In contrast to business banks, these organizations depend for the most part on the reserve funds of people for the assets they loan and contribute. While business banks pay “interest” on funds, thrift establishments regularly pay “profits” on reserve funds stores or offer records.

2. History

1. What’s the origin of thrift institutions?

At the beginning profit was not a priority for the Thrift Institutions, they wanted that people to have a secure location for their money on difficult times. These institutions were created by thoughtful citizens who wanted to help the working class people. (Small Business).

Thrift institutions have been for a long period of time, starting out as “building societies” in the United Kingdom in the late 18th century and then making their way to the U.S. ( Bankrate)

At one point, during the postwar era in the 50s and 60s, most mortgages were financed by Thrift institutions, but this progress and rise were shadowed by the fraud and failures by the savings and loan industry on the 80s. Thrifts still play a key role in helping thousands of families to buy homes. As we can see from the 1830, these institutions were very important to achieve the famous “American Dream” of home ownership. ( MASON)

3. Rol and functions of Thrift Institutions

1. How to become a member

The Federal Home Loan Bank (FHL) is the institution in charged to provide its members ( thrift institutions, commercial banks, credit unions, insurance companies) source of funds for mortgages and assets liability managements, liquidity for a members short term needs and additional funds for housing finance and community developments. ( fhfa.gov source)

To become a member, thrift institutions must meet statutory requirements:

• Be organized under the laws of any state of the United States.
• Be subject to inspection and regulation under the banking laws, or similar state or federal laws.
• Have at least 10 % of its total assets in residential mortgage loans, if it is a federally insured depository institution.
• Have a financial condition that allows FHL bank advance (loans) to made in a safely way.
• Have character of management and a financing policy consistent with economical house financing.

Is important highlight that each member of the FHL bank must keep a minimum investment in the stock of the FHL Bank, and then the sum of the stock investments by all members must be enough for the FHL to meet its own minimum capital of requirements.  (fhfa.gov source)

One of the benefits of the thrift institutions is that they can borrow money from the FHL at a very low rate of interest.

1. Thrift vs. banks:

Nowadays, thrift institutions can be very competitive respecting to commercial banks because they both offer almost the same financial products such as: Transactions, time deposits to consumers, real estate, savings, but they differ in their lending capacity. Thrift institutions have a limit of lending for commercial loans of less than 30 % of assets. This means that the half may be exclusively used to make loans in small business. They must meet a serial of requirements and the 65 percent of its portfolio must be in mortgages and consumer related assets. Commercial and non-commercial banks also differ in terms of authority to subscribe with non-depository institutions, which separate commercial banking from investment banking.

4. Federally Chartered and Insured Thrift Institutions:

Essentially the majority of the nation’s 515 common investment funds banks safeguard their investment accounts. Most are secured by the Federal Deposit Insurance Corporation (F.D.I.C.), a similar organization that safeguards records of business banks up to $10,000. Massachusetts requires its 185 mutual to safeguard through a state finance, yet eight of the biggest of them likewise utilize F.D.I.C., generally for aggressive and limited time purposes.

The Federal Savings and Loan Insurance also protect bank accounts up to $10,000 for each saver in all governmentally contracted investment funds and advance affiliations and in state-sanctioned reserve funds and credit affiliations which apply and meet all requirements for such insurance. About 65 percent everything being equal and advance affiliations—4,098 out of an aggregate of 6,276—have their investment accounts guaranteed by F.S.L.I.C. The benefits of he governmentally protected establishments add up to $67.4 billion, or 94 percent of the aggregate resources all things considered relationship in the country. What’s more, Massachusetts guarantees the records of the 174 state-sanctioned investment funds furthermore, advance organizations in that state, speaking to over $1.2 billion in resources. On the off chance that a governmentally protected investment funds also, advance affiliation ends up bankrupt, the F.S.L.I.C. settles each safeguarded record by installment of money or by making accessible to the holder of the record a moved record in another safeguarded affiliation. (Dickinson)

Funds and advance relationship with government sanctions are liable to the supervision of the Federal Home Loan Bank Board. They are required to be individuals from the Federal Home Loan Bank System, which fills in as a promptly accessible store of credit. Consolidated resources of governmentally sanctioned affiliations currently add up to about $40 billion, or on the other hand 54 percent of the aggregate resources all things considered and advance relationship in the United States.

5. Federal Taxation of Thrift Institutions:

The opposition for savers’ dollars between business banks and thrift foundations has been reflected in a discussion in Washington over government tax collection of the mutual. Preceding 1952, common reserve funds banks and credit affiliations delighted in virtual exclusion from government charges on business pay. In 1951, the Treasury Department suggested that their held income be exhausted on indistinguishable premise from those of business banks. The business banks are allowed to build up tax-exempt stores for awful obligations equivalent to multiple times their normal misfortune encounter over a 20-year time span. The Treasury evaluated that its arrangement would acquire extra income of $150 million yearly.

Under the Revenue Act of 1952, be that as it may, as at long last gone by Congress, thrift foundations were permitted to hold saves tax exempt until the aggregate of their stores, surplus and unified benefits rose to 12 percent of stores. As the Treasury Department called attention to in a report of July 1961 to the House Ways and Means Committee “This uncommon terrible obligation hold arrangement has kept these establishments for all intents and purposes assess excluded on the grounds that they may amass $12 of income tax exempt for each $100 of new stores.” In monetary 1961, investment funds and advance affiliations and common reserve funds banks paid add up to government pay charges of under $10 million, despite the fact that they had resources in abundance of $112 billion and net working salary, after the installment of profits, of about $700 million. Business banks griped that they were paying nearly 40c as duties on each dollar of salary while the common foundations were paying just about 2c.

In his first expense message to Congress, April 20, 1961, President Kennedy called for audit of tax collection arrangements influencing thrift foundations “with the point of guaranteeing nondiscriminatory treatment.” The Treasury Department embraced another investigation of the inquiry and in July 1961 presented its report and suggestions to the House Ways and Means Committee. The report inferred that “extra expense income can be acquired as of now without huge interruption to the common thrift organizations or hindrance to national lodging programs.”

This finding was debated by the Federal Home Loan Bank Board, which said that the effect upon investment funds and advance affiliations of any significant increment in expenses “must fall upon the yearly hold allotments of these relationship, upon the profit rates they pay to savers, or upon a blend of both; whatever the wellspring of pay for the installment of duty, there will unavoidably be an unfavorable impact upon the volume of net individual reserve funds streaming into these organizations.” Henry A. Bubb, a representative for the U.S. Reserve funds and Loan League, told the Ways and Means Committee, Aug. 9, 1961, that while the call of expense correspondence by investors may bid, it spoke to a proceeding with exertion to throttle rivalry and “to occupy to the business banks the business which they have been not able or reluctant to draw in individually.”

6. Protection of Savers in Thrift Institutions:

Ongoing disclosure of genuine maltreatment in the lead of reserve funds and credit activities in Maryland has raised concern somewhere else about the adequacy of security managed share account contributors under state laws. Until the point that medicinal enactment was embraced by the Maryland General Assembly in 1961, an investment funds and credit affiliation could be contracted in the state by any three people for a documenting charge of $30. Absence of any uncommon state controls or supervision of the organizations of state-sanctioned affiliations pulled in deceitful administrators who offered forthcoming savers high financing costs and luxurious presents for opening records. The endowments, contingent upon size of another record, went from timekeepers and radios to TVs and lavish hides. The new affiliations received great titles, for example, First Continental Savings and Loan Association and First Guarantee Savings and Loan Association, and led broad promoting furthermore, standard mail crusades promising remarkable rates of return (now and again of more than six percent).

Conclusion:

Thrift or Saving institutions have been promoting home ownership for long time ago by providing funds to the housing field. This essay shows that the rol is quite important in the financial markets because it has been making a big impact in the life of many Americans in order to achieve their dream to achieve purchasing a home.  From a customer perspective, thrift institutions have a big advantage over commercial banks: higher interest from consumer savings.

These institutions have the benefit to allow to customers to complete financial services product line from securities to insurance to banking. These advantages will weigh at least as heavily in the discussion as whether the thrift still needed to promote residential mortgage financing.

References:

• Small Business. An overview of Thrift Institutions. Retrieved from: https://www.thebalancesmb.com/thrift-institution-393341
• About the FHLBANK System- Federal Home Loan Bank System. Retrieved from: https://www.fhfa.gov/SupervisionRegulation/FederalHomeLoanBanks/Pages/About-FHL-Banks.aspx
• From buildings and loans to bail-outs: A history of the American savings and loan industry, 1831-1990. Mason David.
• Thrift vs. banks: whats the difference?  Retrieved from: https://www.bankrate.com/banking/thrifts-vs-traditional-banks-whats-the-difference/
• Dickinson Jr., W. B. (1962)  Thrift institutions and the mortgage market. Editorial research reports 1962 (Vol. I). Washington, DC: CQ Press
• https://www.investopedia.com/terms/t/thriftbank.asp
• http://library.cqpress.com/cqresearcher/index.php
• http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=thrift+institutions