Tài chính doanh nghiệp - Chapter 17: Thrift institutions and finance companies

Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson UniversityAndLanny R. Martindale, Texas A&M University 1Copyright© 2006 John Wiley & Sons, Inc.CHAPTER 17THRIFT INSTITUTIONS AND FINANCE COMPANIES2Copyright© 2005 John Wiley & Sons, IncInstitutions Covered Thrift Institutions Savings Associations (or S&Ls) Savings Banks Credit UnionsFinance Companies3Copyright© 2006 John Wiley & Sons, Inc.4Copyright© 2006 John Wiley & Sons, Inc.Historical Origins of ThriftsMutual Savings Banks were developed in the 1800s because commercial banks did not serve the needs of small savers.Eventually Mutual Savings Banks invested most of their deposits in mortgage loans.Mutual Savings and Loan Associations and Building Societies were also started in the 1800s by groups of people who pooled their savings so that each would eventually be able to acquire a house.5Copyright© 2006 John Wiley & Sons, Inc.Recent History of ThriftsStockholder-owned savings and loan associations were relatively uncommon until the late 1970s and 1980s when pressure to attract more capital encouraged many mutual S&Ls to convert to stock form.Stock S&Ls outnumber mutuals today.Assets of stock S&Ls are many times as large as the assets of mutual S&Ls.6Copyright© 2006 John Wiley & Sons, Inc.Exhibit 17.3A: Number of Thrift InstitutionsSource: Office of Thrift Supervision, 2003 Fact Book, May 2004.7Copyright© 2006 John Wiley & Sons, Inc.Exhibit 17.3B: Assets of Thrift InstitutionsSource: Office of Thrift Supervision, 2003 Fact Book, May 2004.8Copyright© 2006 John Wiley & Sons, Inc.Thrift Crisis of the 1980sClassic model of thrift management involved a negative maturity GAP:Short-to-medium term fixed-rate savings deposits financingMedium-to-long-term fixed-rate mortgagesThus the sharp interest rate increases of the early 1980s decimated the industryThe problem was compounded by unsound lending practices and other forms of mismanagement9Copyright© 2006 John Wiley & Sons, Inc.10Copyright© 2006 John Wiley & Sons, Inc.11Copyright© 2006 John Wiley & Sons, Inc.Regulation of Thrifts Savings bank regulators—Federal regulator: Office of Thrift SupervisionInsurer: FDIC-SAIF Savings association (S&L) regulators—Federal regulator: OTSInsurer: FDIC-either subsidiary, depending on prior electionState regulators also charter and supervise thriftsFederal Home Loan Banks: 12 regional Federal Home Loan Banks empowered to borrow in capital markets and make loans (called “advances”) to thrifts in their regions. Regulatory powers mostly transferred to OTS. Banks still in place but Federal Home Loan Bank Board abolished in 198912Copyright© 2006 John Wiley & Sons, Inc.Assets of ThriftsResidential mortgages still main asset (about 47%) because of tax breakOther loan types about 21% of industry assetsLiquidity management comparable to commercial banks“OREO”— Other Real Estate Owned—acquired in foreclosures13Copyright© 2006 John Wiley & Sons, Inc.14Copyright© 2006 John Wiley & Sons, Inc.Liabilities of ThriftsDeposits are key, but deposit types are much more varied todayAdvances from FHLB are most important nondeposit source of fundsFed funds present but less important as either source or use compared to banks 15Copyright© 2006 John Wiley & Sons, Inc.16Copyright© 2006 John Wiley & Sons, Inc.Capital Accounts, Standards & Terms analogous to banks Tier 1/ Tier 2Risk-weighting of assetsMinimum ratios17Copyright© 2006 John Wiley & Sons, Inc.18Copyright© 2006 John Wiley & Sons, Inc.Income, Expenses, & Performance Structure of income statement comparable to banksNet Interest Margin about 3%,; below commercial banking but stable deposit rates have fallen more rapidly than mortgage ratesinstitutions take much less interest rate risk than they used toProvision for loan losses reflects sounder lending practicesIndustry ROAA averages around 1.3%; ROAE around 14%.19Copyright© 2006 John Wiley & Sons, Inc.20Copyright© 2006 John Wiley & Sons, Inc.21Copyright© 2006 John Wiley & Sons, Inc.22Copyright© 2006 John Wiley & Sons, Inc.Credit UnionsMutual institutions organized much like a club with each member(share owner) having a vote to elect the board of directors.Membership requires a common bond (e.g., same employer, church, trade association).Credit Union Assets have grown steadily in recent years.23Copyright© 2006 John Wiley & Sons, Inc.Crucial Differences from Other Depository Institutions Always and strictly mutually owned; organized like clubsCommon-bond membership/exemption from antitrust constraints. Most common bonds are occupational. Others are associational/fraternal or residentialNot-for-profit and therefore tax-exemptExpected to concentrate on smaller consumer loans24Copyright© 2006 John Wiley & Sons, Inc.Credit Union RegulationRegulated by the National Credit Union Administration (NUCA).Deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF).Liquidity is provided by the Credit Liquidity Facility (CLF).25Copyright© 2006 John Wiley & Sons, Inc.Credit Union AssetsCredit union member loans constitute over 60 percent of total CU assets.Other assets include cash and investments.26Copyright© 2006 John Wiley & Sons, Inc.Credit Union LiabilitiesRegular Share Accounts are like savings accountsShare certificates are time deposits like CDs, and have become a more important source of fundsShare drafts are CU interest-bearing checking accounts.Notes Payable/Certificates of IndebtednessNet worth includes reserves and undivided earnings.27Copyright© 2006 John Wiley & Sons, Inc.Credit Union DevelopmentsSmall credit unions are merging or liquidatingCredit unions are adopting new technologies, especially larger credit unionsFunds flows are becoming increasingly coordinatedCorporate central credit unions - correspondent banking for credit unionsPowerful trade associations/lobbying groups -CUNA - NAFCU28Copyright© 2006 John Wiley & Sons, Inc. Finance CompaniesLenders to businesses and consumers who are higher risk borrowers.Highly leveraged; borrowing funds from banks and the open market.Most larger finance companies are now subsidiaries of bank and financial holding companies.Many "nonbank" banks or consumer banks are similar to finance companies.Finance companies are diverse and adaptive to changing needs.29Copyright© 2006 John Wiley & Sons, Inc.Finance Company AssetsInvestment securities, real assets, cash, and deposits represent a small percent of assets.Consumer receivables (loans)Personal loans.Automobile credit.Mobile home credit.Revolving Consumer Installment Credit.Other Consumer Installment Credit.Real Estate Lending (second mortgages) is the fastest growing area of finance company lending.30Copyright© 2006 John Wiley & Sons, Inc.Finance Company Assets, cont.Business credit -- area of growth in recent yearsWholesale paper -- loans to finance inventories. "Floor plan" is a type of wholesale paper.Retail paper -- purchase of consumer sales (loan) contracts from retailers.Lease paper -- leasing business equipment and consumer durables.Commercial accounts receivable financing.Factoring -- the purchase of accounts receivables.31Copyright© 2006 John Wiley & Sons, Inc.Liabilities and Net WorthNet worth: highly leveraged.Net worth level directly related to riskiness of loan portfolio.But cannot neglect N/W; borrowing ability depends on credit ratingDebt:Bank debtCommercial paperTransfer credit from parent companiesLong-term debt when rates are low32Copyright© 2006 John Wiley & Sons, Inc.Regulation of Finance Companies:Consumer Protection more than Safety & SoundnessInterest rate ceilings on loans, but phased out in most statesDebt collection practicesBranching, chartering, and merger restrictionsTruth-in-lendingBankruptcy protections33Copyright© 2006 John Wiley & Sons, Inc.Finance Company DevelopmentsSecuritization Shift toward business creditShift toward second mortgage lendingGrowth of leasingGrowth of home equity credit linesDecline in small finance companies34Copyright© 2006 John Wiley & Sons, Inc.