What Is a Thrift Bank?
A thrift bank is a type of small financial institution that primarily accepts deposits and originates home mortgages. Known also as "savings and loan associations," or S&Ls. thrifts differ from larger commercial banks such as Wells Fargo or Bank of America in offering higher savings account yields and limited lending to businesses.
Thrift banks are structured either as corporate entities owned by shareholders, or as mutual associations owned by their customers, both borrowers and depositors.
While the thrifts' core offerings are traditional savings accounts and home loan origination, these institutions increasingly also offer checking accounts, personal and auto loans, and credit cards. Thrifts are structured either as corporate entities owned by shareholders, or as mutual associations owned by their customers, both borrowers and depositors.
The Birth of the Thrift, A.K.A. the Savings and Loan
The thrift-banking system began with the establishment of the customer-owned building society in the United Kingdom, beginning in the 18th century. The impetus for the S&L, its U.S. successor, was to improve a mortgage market that was problematic, to say the least.
In the early decades of the 20th century, the typical U.S.mortgage was a five-to-10-year, interest-only loan that had to be refinanced or paid off with a large balloon payment at the end of the term. Unsurprisingly, homeowners often defaulted on those payments, especially as the Great Depression advanced and unemployment rose.
Passed by the Hoover administration in 1932, the Federal Home Loan Bank Act aimed to encourage home ownership by providing a source of low-cost funds for member banks to use in extending mortgage loans. As the first in a series of bills that sought to make home ownership an achievable goal for more Americans, the act also created the Federal Home Loan Bank Board and funded it with $125 million, facilitated development of a secondary market for mortgages, and created savings and loan institutions to issue those mortgages.
The amount of their loan portfolio that thrift banks are required by law to commit to loans to consumers, rather than to businesses.
The Impact of Thrift Banks
Coupled with a mortgage insurance program created by the Veterans Administration in 1944, S&Ls facilitated the purchase of homes in the suburbs by returning war veterans. The classic 1946 movie "It's a Wonderful Life" underlined that facilitation with its story of S&L leader George Bailey, played by Jimmy Stewart, financing a development that allows young families to escape grim rental properties and acquire their own homes in "Bailey Park."
Throughout the 1960s and 1970s, almost all mortgages were issued through S&Ls. Thanks in part to these institutions, and all the other federal programs, homeownership in the U.S. rose from 44% in 1940 to 64% by 1980. Following the savings and loan crisis in the 1980s, when many thrifts failed, structural changes were made to thrift banks that have blurred some of the distinctions between them and conventional banks.
Passed in 2010, the Dodd-Frank Act eliminated key advantages of thrifts, such as less stringent regulations than were applied to major banks. The commitment of the S&Ls to serving consumers continues, however. Thrift banks are required by law to commit 65% or more of their loan portfolio to loans to consumers rather than to businesses.