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If your holiday traditions include watching Jimmy Stewart learn that “It’s a Wonderful Life,” you probably remember the spunky Bailey Bros. Building & Loan Association and how it financed hundreds of single family homes in good old Bedford Falls.
But although not as common as they once were, savings and loan associations, or “savings,” still play an important role in the financial lives of many Americans.
The biggest difference between a savings bank and a conventional bank is that savings banks are designed to serve American consumers rather than businesses. By law, savings must have 65% of their loan portfolio tied up in consumer loans, says Tanya Marsh, a law professor at Wake Forest University in Winston-Salem, North Carolina.
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What do the savings
A typical consumer probably won’t notice many of the obvious differences between a savings and, say, a community bank. Like community banks, thrifts are typically smaller, local institutions and don’t have the reach or resources of a large national bank like Chase or Bank of America, Marsh says.
Savings offers customers many of the same deposit products you can get at a bank, such as checking accounts, savings accounts and certificates of deposit, as well as credit products such as home loans and cars and credit cards. Just like with a bank, all of your deposits up to $250,000 are backed by the full trust and credit of the US government through the Federal Deposit Insurance Corp.
From a consumer perspective, savings have one big advantage over banks: a higher interest rate on customers’ savings.
“Because savings can borrow money from federal mortgage banks at a low interest rate, this generally results in higher interest rates on savings savings accounts compared to commercial banks. “, explains Marsh. “That has traditionally been one of their advantages.”
What savings don’t do
Savings typically doesn’t offer the kind of one-stop-shop for financial services you’ll find at many banks, says Brett Rabatin, CFA, analyst and principal at Piper Jaffray, an investment bank and asset management firm based in Minneapolis.
“If you enter a savings and credit or savings branch, compared to a commercial bank, the product set will be much simpler,” says Rabatin.
This means that you are likely to find fewer account types and fewer wealth management, foreign exchange and insurance products and services than at a conventional bank.
Stand up for the little guy
Thrift stores have been around for a long time, starting as “building societies” in the UK in the late 18th century and eventually making their way to the United States.
“Savings charters actually date back to before the Civil War,” says Chris Cole, executive vice president and senior regulatory advisor at Independent Community Bankers of America.
The description of thrift stores in that old movie “It’s a Wonderful Life” is in some ways pretty accurate. Whether mutual (owned by their customers) or corporate (owned by shareholders), they served a primary purpose in the American economy: to ensure that working-class people could obtain mortgages to buy single-family homes. .
Millions of post-war Americans bought homes with savings loans; at some point in the post-war period, they were doing the majority of mortgages in the United States, Cole says.
That changed when deregulation of the financial services industry, followed by a wave of failures in the 1980s, decimated savings.
“The savings industry has not recovered from the S&L (savings and lending) crisis decades ago,” says Wake Forest’s Marsh.
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May be harder to find in the future
These days, the lines between savings banks and conventional banks have blurred, says Rabatin of Piper Jaffray. Savings and credit associations are turning more to commercial lending and construction, and a growing number are converting to conventional banks.
In addition, many of the advantages that economies enjoyed, including less stringent regulation, have been eliminated over the years, most recently by the Dodd-Frank Financial Reform Act.
“I don’t know why anyone would start a thrift store today,” says Marsh. “People are loyal to local institutions, so some of them may hang on. But it’s a rapidly consolidating industry overall.