Financial Reform: Savings Associations or “Thrifts”

Financial Reform: Savings Associations or “Thrifts”

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January 29, 2018
Financial Reform: Savings Associations or “Thrifts”
The degree to which the regulatory regime facing federal
OTS was still the primary thrift regulator at the onset of the
savings associations—also called “thrifts”—and banks
2007-2009 financial crisis, and the institutions it oversaw
should differ is a prominent policy issue in the 115th
included thrift holding companies (THCs)—parent holding
Congress. For example, S. 2155 and H.R. 10 propose to
companies that owned at least one thrift and (in certain
allow certain federal thrifts to effectively opt in to the
cases) many other nondepository subsidiaries. Although
national bank regulatory regime. This In Focus provides
depositories of all types failed in the crisis, some observers
background on federal savings associations and examines
were particularly critical of perceived shortcomings in OTS
policy issues and proposals related to these institutions.
supervision of large THCs. Some distressed THCs—e.g.,
AIG (mainly an insurance firm), Lehman Brothers (mainly
Background
a securities firm), and Washington Mutual (mainly a
Savings associations—or “thrifts”—are institutions that,
depository)—were arguably among the most destabilizing
like banks and other depositories, accept deposits that are
sources of systemic risk.
federally insured and make loans. Both banks and thrifts
can be primarily subject to a state or federal regulatory
Title III of the Dodd-Frank Act (DFA; P.L. 111-203)
regime depending on who they choose as a chartering
eliminated the OTS and reassigned the primary regulation
authority. However, the two types of institutions hold
of thrifts to the banking agencies. The Federal Reserve (the
different charters, meaning they are allowed to perform
Fed) acquired authority over THCs, the FDIC over state
different activities and are subject to different regulations.
thrifts, and the Office of the Comptroller of the Currency
(OCC) over federal thrifts, as shown in Figure 1. This
The federal thrift charter was established during the Great
eliminated what was often perceived as a flawed regulator,
Depression by the Home Owners’ Loan Act (P.L. 73-43)
and many hoped that consolidation would lead to more
with the intent of increasing the availability of mortgages.
consistent regulation, supervision, and enforcement across
To achieve this, the charter required thrifts to focus on
charters.
home mortgage lending. Thus, thrifts generally have faced
limits on certain other types of lending. Over time, the
Figure 1. Dodd-Frank Changes to Thrift Regulation
federal charter has been expanded to allow federal thrifts to
offer many products similar to those offered by national
banks, narrowing the differences between the two.
Nevertheless, differences remain. For example, federal
thrifts are limited in the amount of commercial and non-
residential real estate loans they can hold, whereas national
banks do not face the same restrictions.
Savings associations played a role in two recent financial
crises—the savings and loan (S&L) crisis of the 1980s and
1990s and the 2007-2009 financial crisis—and in both cases
thrift regulation was changed pursuant to subsequent
legislation. From 1986 to 1995, more than 1,000 thrifts
failed (with failures occurring at both federal- and state-
chartered thrifts, including at both savings associations and
S&L associations), at a cost to taxpayers of approximately

$124 billion, according to a Federal Deposit Insurance
Source: CRS.
Corporation (FDIC) analysis. Numerous economic and
Notes: Blue = existing, red = eliminated. See text for details.
regulatory developments preceding the S&L crisis have
been cited as possible causes. Notably, some argued that the
Policy Issues
Federal Home Loan Board—the primary federal thrift
A broad, long-standing issue underlying debates over thrift
regulator and an independent agency—had become too lax
regulation is to what degree the government should offer
in its supervision and regulation of thrifts. In response to
different charters (with different benefits, responsibilities,
the S&L crisis, Congress passed the Financial Institutions
and regulators) to banks and thrifts that engage in similar
Reform and Recovery and Enforcement Act (P.L. 101-73),
deposit taking and loan making, and whether the difference
which (among other things) established the Office of Thrift
between the charters should be narrowed.
Supervision (OTS) as a bureau of the Treasury Department,
and transferred regulatory authority over thrifts to OTS.
On one hand, a system of differentiated charters could give
institutions with different business models and ownership
arrangements the ability to have regulation tailored to suit
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Financial Reform: Savings Associations or “Thrifts”
their business needs and risks. Reducing regulatory
as credit unions—at a disadvantage. In addition, they argue
differentiation could put a group of depositories at a
that creating another regulatory option that shares
competitive disadvantage relative to others if (1) different
characteristics with both aspects of national bank and thrift
groups of depositories are currently subject to appropriately
requirements could potentially create an opportunity for
designed regulatory frameworks and (2) the new, more
institutions to cherry pick aspects of each regulatory regime
homogenous regulatory framework would be more
that results in inappropriately lenient regulation.
burdensome on one group relative to others.
Large Thrift Holding Companies. Depositories can be
On the other hand, a differentiated system could provide an
(but are not always) subsidiaries of a parent holding
opportunity for institutions to strategically choose a charter
company that may own other nondepository financial
type based on what they perceive would be the most lenient
subsidiaries. Holding companies may incorporate as bank
regulatory regime. In addition, regulators—which are
holding companies (BHCs) or THCs, depending on the
funded at least in part by fees they charge the institutions
charter of the depositories. Similar to BHCs, THCs have
they regulate—may have an incentive to offer a more
subsidiaries that accept deposits and make loans; can own
relaxed regulatory treatment.
nonbank subsidiaries; and are regulated by the Fed.
An important consideration in optimizing the degree of
One area in which the two types of organizations differ is
differentiation is determining the degree to which the
the application of certain enhanced prudential regulations
business models of different depository types differ. If they
pursuant to the DFA. In response to the 2007-2009 crisis
differ significantly, differentiated charters could create
and with the aim of addressing financial stability and “too
substantive benefits. To the extent this is the case, proposals
big to fail” institutions, the DFA created a new prudential
that reduce the differences in charters reduce the benefits of
regulatory regime that applies to all BHCs with more than
maintaining separate charters. In contrast, if banks and
$50 billion in assets and to certain other financial
thrifts are in essence similar businesses, differentiated
institutions. Under this regime, the Federal Reserve is
charters may be inefficient and unnecessary.
required to apply a number of safety and soundness
requirements to large banks that are more stringent than
Legislative Alternatives
those applied to smaller banks.
Option to Operate as a Bank. Section 206 of S. 2155
would allow certain federal savings associations with less
Although a number of these enhanced regulations have
than $15 billion in assets to elect to operate with the same
been implemented for BHCs, to date they have not been
rights as national banks (while still being treated as thrifts
applied to THCs with $50 billion or more in assets. As of
for purposes of certain regulations, including those related
June 2017, official regulatory data report six THCs that
to corporate governance, consolidations, and mergers)
have more than $50 billion in assets, with some having
without having to change charters. This would remove
more than $200 billion. These include firms in the securities
certain lending limits thrifts face on certain loan types,
or insurance industries that have limited deposit and lending
including consumer, business, and commercial real estate
operations.
loans. H.R. 1426 and Section 551 of H.R. 10 would allow
for the same election, without a size limit.
However, implementation of DFA regulations is ongoing
and prefatory material accompanying a 2014 regulation
A federal thrift may want to alter its business model
noted that the Fed “may apply additional prudential
(perhaps by expanding in a certain loan type), but so doing
requirements to certain [THCs] that are similar to the
would violate limitations faced by thrifts, but not national
enhanced prudential standards if it determines that such
banks. Currently, implementing such a change would
standards are consistent with the safety and soundness of
require converting to a national bank charter. The
such companies.” In addition, individual THCs could be
conversion process may act as a safeguard against certain
subjected to enhanced regulation by a Financial Stability
institutions imprudently changing their risk profile, but can
Oversight Council nonbank systemically important
be costly, time consuming, and may necessitate a change in
financial institution designation. No THC has been
ownership structure.
designated to date, however.
If a federal thrift can opt to be treated as a national bank
Congress might consider whether there is sufficient
without changing charters, some thrifts may be able to alter
difference between the complexity and interconnectedness
their business models more quickly and at less cost.
of large THCs compared with their BHC peers to warrant
Supporters argue that this would provide thrifts flexibility
THC omission from the enhanced regulatory regime. If
to adapt to changing economic conditions. Furthermore,
Congress finds the two types of institutions pose similar
they argue that the change would not pose a safety and
risks, it could approve legislation directing the Fed to
soundness risk because federal thrifts are regulated by the
subject large THCs to the regime. Conversely, if Congress
same regulator—the OCC—as national banks. In addition,
finds they are different, it could explicitly exempt THCs.
the bills would provide the OCC with authority to issue
necessary safety and soundness regulations.
Marc Labonte, Specialist in Macroeconomic Policy
David W. Perkins, Analyst in Macroeconomic Policy
Opponents of the proposals have argued this is an
inappropriate expansion of thrifts’ permitted activities that,
IF10818
if applied only to thrifts could put other depositories—such
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Financial Reform: Savings Associations or “Thrifts”

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