What is a Mutual Savings Bank (MSB)?

A mutual savings bank is a type of thrift institution originally designed to serve low-income individuals. Historically, these individuals invested in long-term, fixed-rate assets, such as mortgages. Initiated in 1816, the first mutual savings banks (MSBs) were the Philadelphia Saving Society and Boston's Provident Institution for Saving. Most MSBs had primary locations in the Mid-Atlantic and industrial Northeast regions of the United States. By 1910, there were 637 of these institutions.

How a Mutual Savings Bank (MSB) Works

MSBs were generally very successful until the 1970s. During the 1980s, regulations governing what MSBs could invest in, along with what rate of interest they could pay to customers, combined with rising interest rates, caused MSBs massive losses. Consequently, many MSBs failed in the 1980s; others merged, became commercial banks, or converted to stock form.

Key Takeaways

  • Mutual savings banks (MSBs) deposits are insured by the FDIC.
  • Mutual savings banks allow customers to maintain accounts with low balances while earning interest.
  • If you open an account with a mutual savings bank, you are considered an “owner” in the bank, as mutual savings banks do not have outside shareholders like traditional banks.

MSBs traditionally invested in mortgages. Individuals and businesses will use mortgages to make large real estate purchases without paying the entire value of the up front. Fixed-rate mortgages (also called a “traditional" mortgage) adjustable-rate mortgages (ARM) exist. Although a mortgage is usually a contract between a borrower and lender, mortgages can be pooled together and become available for investment by outside parties.

Mutual savings banks are chartered by local or regional governments and do not offer capital stock, but rather the bank is owned by its members, and any profits are shared among its members.

Mutual Savings Banks vs. Credit Unions

Like mutual savings banks, credit unions were another form of financial institution outside of a traditional commercial bank. While credit unions and mutual savings banks offer generally similar services (e.g. accepting deposits, lending money, and selling financial products such as credit and debit cards and certificates of deposit or CDs), there are key structural differences.

These differences largely surround how the two types of institutions generate income. While mutual savings banks function to generate profits for their member shareholders, credit unions operate as not-for-profit organizations, designed to serve their members, who also are de facto owners.

Members of credit unions will pool their money (i.e. purchase shares in the cooperative); these funds allow members to then provide loans, demand deposit accounts, and other financial products and services to one another.

Most credit unions are significantly smaller than retail banks. They usually focus on serving a particular region, industry or group. For example, the Navy Federal Credit Union (NFCU) has 300 branches, largely near military bases, and is the largest credit union by asset size in the U.S. and is open to members of the military.

Special Considerations

Commercial banks make money by charging interest income on loans they provide to customers. Customer deposits, such as checking and money market accounts, provide banks with the capital to make loans in the first place. The interest rate the bank charges for what it lends tends to be greater than what it pays on deposits.