Understanding (S&L) Savings and Loan Associations

Savings & Loan (S&L) associations are quite common in United States. They accept deposits and give loans only to their members. So the customers of an S&L association are also its members or shareholders. S&L associations are also known as credit unions. They give a variety of loans to their customers. These include mortgage loans, business loans, personal loans etc. They also provide checking and savings account services to their customers. Because customers are also the members of these associations, they are able to get loans at lower interest rates.

Regulatory restrictions on S&L lending

As per prevailing regulation in United States, S&L associations can lend only up to 20% of their assets for commercial loans. The bulk of their lending is towards home mortgage loans. S&L associations also offer consumer loans through credit cards. Some also offer wealth management services.

What was the S&L crisis?

The S&L crisis of 1980s was a major financial crisis in United States. Earlier, there were regulatory caps on the interest rates that S&L associations can offer on their deposits and the interest rates that they can charge on the loans that they give. These caps were removed under President Ronal Regan’s administration. Once these caps were removed, S&L associations started attracting more deposits and members by offering higher interest rates. They also started lending aggressively. The restrictions removed under President Regan’s administration also allowed S&L associations to give loans for buying riskier assets such as low grade bonds.

Many S&L associations gave loans recklessly to their members during the decade of 80s. These loans were given without doing adequate credit checks. Some loans were given against fraudulent, overvalued assets. The result of all this was that default rates on loans given by S&L associations went up sharply in the late years of the decade of 80s and in early years of the decade of 90s. Around 1000 S&L associations were wiped out because of this crisis. Many had to be saved through bailout by taxpayers’ money.