Savings Institutions

I INTRODUCTION

Savings Institutions, banks or organizations originally established to encourage personal savings through the deposit by individuals of money that accrued earnings in the form of interest. Major savings institutions are building societies, savings and loan associations (SLAs), and savings banks.

II BUILDING SOCIETIES

Unique to the United Kingdom, building societies were originally established in the 18th century as non-profit-making cooperatives assisting their members in buying homes. They grew and consolidated into an important sector of the British financial world and now offer much the same services as banks. Building societies traditionally concentrate on providing savings accounts for depositors, and on providing loans and mortgages for homebuyers. The building societies dominate the British domestic market for mortgage provision, providing up to 75 percent of home loans in Britain.

Reform legislation passed in 1986 permitted the building societies to incorporate themselves as banks, which increasing numbers elected to do. The same legislation allowed them to extend their services to provide cash dispensers, cheque and easy-access accounts, business and other general loans, foreign exchange services, investment plans, and other services hitherto associated with banks. (This reflected the expansion of the building societies from their original cooperative roots.) Banks were likewise able to offer mortgage and home loan services. The effect was to allow the building societies to further consolidate their position as major players in the British financial services industry.

III SAVINGS AND LOAN ASSOCIATIONS

Savings and loan associations (also sometimes called thrifts) are especially important in the United States, making up the second-largest group of financial institutions; only commercial banks account for more savings deposits and assets. Patterned after British building societies, the SLAs were founded because commercial banking dealt primarily with the nation’s commercial and industrial needs.

In the early days, the sole purpose of most savings associations was to enable members to purchase a home. Each member would deposit a monthly payment, and the institutions were set up so that these payments would allow one member per month to buy a home. The member who was granted a mortgage then paid monthly instalments until the debt was satisfied. The associations remained in business until all members had received funds to purchase homes, and then they were usually dissolved.

The success of these SLAs led to the development of a kind of association. Members were admitted on a quarterly, semi-annual, or annual basis to these institutions, which had a continuing life. Many of these newer savings associations accepted members who wanted to save, but not necessarily to buy a home. Borrowers were charged interest on their loans; savers were repaid their contributions plus earnings at the completion of their contracts. This important development encouraged the accumulation of capital for reasons other than, or in addition to, the purchase of homes. The third step in the evolution of the savings and loan business was the organization of permanent associations that accepted members on a daily basis and paid out earnings in regular instalments. These institutions financed homes and charged interest much as they do today.

Financial difficulties experienced by associations in several states in the 1980s stimulated efforts to make federal deposit insurance universal. By 1988 many SLAs had experienced severe financial losses and hundreds of insolvent institutions had been shut down by the Federal Home Loan Bank Board. A bailout bill passed by Congress in 1989 allocated more than $160 billion over a 10-year period to restructure the savings and loan industry while preserving depositors’ assets.

IV TRADITIONAL SAVINGS BANKS

The first savings bank was established in Ruthwell, Scotland, in 1810. It was the conception of the Reverend Henry Duncan, who attempted to relieve the poverty of his congregation by providing a means for the ready saving of small sums. Traditional savings banks have no stockholders, and their assets are administered for the sole benefit of present and future depositors, with earnings paid to such depositors after expenses are met and reserves are set aside for depositors’ protection. Accounts are interest-bearing. During the 1980s savings banks were in a great state of flux; many began to provide the same kinds of services as commercial banks. Savings banks now offer a full range of financial services including cash dispensers, cheque accounts, consumer and business loans, and trust and credit card services.

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