They are called depository institutions (DIs) because a significant proportion of their
funds comes from customer deposits.
There are 3 DIs:
1‐Commercial Banks
‐Savings Institutions
‐Credit Unions
Historically, each institution has been mostly concentrated in a specific field:
‐Commercial banks focused on Business loans (or commercial and industrial C&I) (i.e.
lines of credit, equipment purchase, start‐ups loans, trade financing, invoice
factory expansion) and securities investments.
‐Savings & Loans were mostly involved in mortgage lending (mainly residential)
‐Credit unions mainly offered consumer loans (car, furniture, appliances etc.)
However, recently these differences started to fade away due to competition, changing
in regulations and in financial and business technology
Commercial banks are the largest depository institutions measured by asset size.
They’re owned and managed by the board of directors that are appointed (voted) by the
They accept deposits (liabilities) and make loans (assets):
‐Assets: Diversified loan range: mortgage (residential), Business (C&I) and consumer
‐Liabilities: Commercial bank liabilities include non‐deposit sources of funds: Equity,
Debts (Bonds, Fed funds borrowing, Repos)
Recently, there has been a heavy concentration in mortgage (residential) loans.
Commercial banking is regulated separately from the activities of thrifts (savings
institutions and credit unions)
Quick history:
The number of commercial banks was high up until the 80s then it shrank gradually. The
consolidation was mostly through mergers & acquisitions M&A:
J. P. Morgan’s acquisition of Chase Manhattan (for $33.6 billion) in Sept. 2000,
Norwest’s acquisition of Wells Fargo (for $34.3 billion) in June 1998,
Bank of America’s acquisition of FleetBoston Financial ($49.3 billion) in Oct. 2003,
J. P. Morgan Chase’s acquisition of Bank One (for $60.0 billion) in Jan. 2004, and
NationsBank’s acquisition of BankAmerica (for $61.6 billion) in April 1998
Community banks: Under $1 billion in asset size. They specialize in retail or consumer
banking (residential mortgages and consumer loans) and accessing the local deposit
base. Their number is reduced by consolidation
Regional or Superregional banks: Over $1 billion in asset size. They engage in a
complete array of wholesale commercial banking activities (consumer, residential and
commercial and industrial C&I lending) regionally and nationally.
Large commercial banks can access interbank market (or federal funds market) to
finance their lending and investment activities
The bigger the banks, the larger the market they operate in, the narrower their spreads
due to local competition, already well introduced in the localized markets
Some banks have a separate title of money center banks when they mostly rely on
borrowed funds rather than on deposits. The main reason is that they might just lack
retail branching and direct access to deposits, regardless of their sizes.
Large banks have focused more on off‐balance‐sheet activities to generate income. As a
result their ROAs and ROEs have outperformed those of the smaller banks
Large banks rely on factual financial information, computer models, and centralized
decision making as the basis for conducting business.
Small banks focus more on relationship banking, basing decisions on personal
knowledge of customers’ creditworthiness and an understanding of business conditions
in the communities they serve. Community banks will likely continue to exist because of
the important financial services they provide (for which there is little substitute) to the
small businesses, and to the community at large
Small (community) banks focus on relationship banking (banking based on relations and
direct contact) and community involvement (whatever helps the community stand and
Banks can be chartered nationally by the OCC (mostly large banks) or By the states
agencies (on a state level), allowing for a dual banking system
Federal funds market: An interbank market for short‐term borrowing and lending of bank
Spreads: The difference between lending rates and deposit rates
Money center banks: Banks that have a heavy reliance on non‐deposit or borrowed
sources of funds.
Off‐Balance sheet (OBS) activities: Activities that will only be recorded in the balance
sheet when a contingent event occurs.
ROA: Return on Assets, ROE: Return on Equity
Dual Banking System: The coexistence of both nationally chartered and state chartered
banks in the United States:
A state chartered bank and a federally chartered bank can coexist and work in the same
Uses of funds (Assets):
‐Residential mortgages (as primary assets, with the highest percentage), in addition to
Mortgage Backed Securities MBS.
‐Business (Commercial and Industrial C&I) such as equipment financing, construction or
expansion, and Consumer loans
‐Securities investments: marketable securities (short‐run: T‐bills, CDs, other money
market instruments, investment securities (long‐run): stocks & bonds
*Business loans were the major asset in commercial bank balance sheets between 1965
and 1990. Then, there was a rise in mortgage loans and MBS, and in holdings of
securities. Types of business loans: construction projects, expansion plans, acquisitions
Sources of funds (Liabilities):
Commercial banks have two major sources of funds other than the equity provided by
‐Deposits (as primary liability)
‐Non‐deposit borrowed funds: Short and long term funds (Repos, Fed Funds, bonds)
They also hold Equity (also called Net worth)
*Commercial banks are highly leveraged. Equity could be as low as 10%. even a
relatively small number of loan defaults can wipe out the equity of a bank, leaving it
insolvent, which constitutes a major credit risk ! (Credit risk is the risk of payment
Depository sources:
1‐Transaction Accounts:
Demand deposit: Non‐interest bearing checking account. Demand deposit account can’t
offer interest due to regulation Q (up until 2011).
Commercial banks can offer demand deposits with interest since 2011
Negotiable Order of Withdrawal NOW: It is similar to a checking account (demand
deposit) that pays interest (Interest bearing account). Offered by savings institutions for
the first time in 1974, as a direct challenge to regulation Q, to compete with commercial
banks (by offering a demand deposit account that pays interest). Commercial banks
started to offer NOW accounts as well since 1980. Contrary to demand deposits, NOW
account has limited withdrawals and transfers and a minimum balance to uphold. The
interest rate offered by NOW account has been restricted by regulation Q up to a certain
maximum (imposing a ceiling to interest rate) up until 1986. From then on, there was no
limit to how much interest it can offer (depending on competition)
2‐Savings deposits (Non Transaction Accounts):
Passbook savings (Retail time deposit): Interest bearing savings account. Same as for
NOW, interest rate offered was restricted up to a certain ceiling until 1986.
Automatic Transfer Service ATS:. It Links demand and savings deposits: It’s an automatic
transfer of funds from savings account to demand (checking) account to fulfill a
payment or withdrawal request from demand deposit whenever its balance is not
sufficient. It is used to circumvent the non‐interest payment by demand deposit
(due to
reg. Q), So depositor can enjoy interest from savings deposit and checking services from a
demand deposit.
3‐Time deposits:
Retail CDs: Small fixed‐maturity interest‐ bearing CDs, under USD 100,000. It can be
cashed out before maturity, but for a penalty
Negotiable CDs: Large fixed‐maturity interest‐bearing CDs over USD 100,000. It cannot
be cashed out before maturity i.e. Jumbo CDs. However, they can be sold in the
secondary market before expiration.
4‐Money Market Deposit Account MMDA:
Cross between checking and savings account. It offers higher interest than savings
accounts (and NOW), by investing in money market funds (funds specialized in money
market instruments). It however imposes minimum balance, and restricts number of
deposits and withdrawals. It has no specific maturity (it can continue to exist as long as
the customer is invested)
*MMDA have been gaining ground over savings accounts lately.
Non‐Depository sources:
1‐Bank Reserves: Purchase (borrow) of funds from banks:
Lend/borrow reserves to/from Fed fund market (other banks) at Fed fund rate
2‐Fed Loans (Discount loans): Purchase (borrow) of funds from the Fed:
At discount window or facility allowing commercial banks to borrow short‐term loans
(usually overnight) from CB at discount rate.
3‐Repos (Repurchase Agreements):
Short‐term lending (usually overnight), securities used at collateral, handled by Fed fund
broker that facilitates reserve management
4‐Long‐term borrowing (Bonds):
Long‐term sources of funds, used to finance long‐term assets (i.e. long‐term mortgages)
Paid in capital + Retained Earnings + Preferred stock
Minimum requirement (10% of total assets) as a buffer against from losses or bank runs
Discount window: A facility controlled by the Fed (Central bank) that allows eligible
banks to borrow money from the Fed, usually on a short‐term basis, to meet temporary
shortages of liquidity caused by internal or external disruptions.
Fed fund rate: Rate at which banks lend/borrow from eachother in the interbank market
Discount rate: Rate at which banks borrow from the Fed
Paid in capital: part of the capital that’s been paid by the investors when shares were
issued and capital was raised
Retained earnings: the accumulated net income of the bank that is retained for
Preferred stock: Ownership with higher claim on bank’s asset. It earns a mandatory
dividend that has to be paid before common dividend, and ha no voting rights
Off‐Balance‐Sheet Activities OBS
Banks conduct many fee‐related activities off the balance sheet (OBS). They hope to
earn additional fee income to complement declining margins or spreads on their
traditional lending business. OBS activities are becoming increasingly important, in
terms of their dollar value and the income they generate for banks.
The most common OBS instruments:
Letter of Credit: A letter from a bank guaranteeing that a buyer’s payment to a seller
(usually from a different country) will be received on time and for the correct amount. In
the event that the buyer is unable to make payment on the purchase, the bank will be
required to cover the full or remaining amount of the purchase. It’s usually used in
import‐export business transactions
Loan Commitment. An amount in loans that a bank will make or may be required to
make in the near future, but has not yet made.
When issued WI securities trading: Trading in securities prior to their issue (using
forward contracts). The transaction is settled only after the security has been issued. I.e.
commitments to purchase T‐bills prior to announcement, and sell them forward in
secondary markets
Loan sale occurs when an FI originates a loan and sells it (either with or without
recourse) to an outside buyer. The loan is removed from the balance sheet and is sold
before maturity. Some examples might be: MBS (Mortgage backed securities), CMO
(Collateralized mortgage obligation) and MBB (Mortgage backed bond). In that case, the
FI becomes just a servicer (servicing the loan payments: passing them through to the new
owners but for fees)
*Recourse is the ability of a loan buyer to sell the loan back to the originator if it goes
bad. FI usually remove credit risk from the original loans. FI becomes a servicer. Ex:
OBS activities move into the balance sheet and become either:
OBS Assets: when contingent event occurs or income is realized
OBS Liabilities: when contingent event occurs or expense is incurred
OBS Asset: An item that moves onto the asset side of the balance sheet when a
contingent event occurs, or an income item is realized on the income statement
OBS Liability: An item that moves onto the liability side of the balance sheet when a
contingent event occurs, or an expense item is realized on the income statement.
Other Fee Generating Activities:
1‐Trust Services
The trust department of a commercial bank acts as trustee or fiduciary, and holds and
manages assets for individuals or corporations. Only the largest banks have sufficient
staff to offer trust services. Individual trusts represent about one‐half of all trusts
managed by commercial banks.
Possible clients for trust services are trust funds, pension funds and individual investors.
Administrative services:
Help coordinate the Estate assets settlement among heirs
Contribute to client’s preferred charitable causes
Provide for dependents: college tuition, medical care etc.
Provide insurance coverage for held assets against losses
Investment management services:
Manage the trust fund (putting them to work) so it can grow and meet future
investing and divesting in assets according to the trust documents that spell out the
grantor wishes and restrictions.
Correspondent Banking service
Providing banking services to other banks. Services could be offered to foreign or
domestic banks.
‐Foreign banks: Correspondent bank acts on behalf of foreign bank as its agent
domestically, when it’s not economically feasible for foreign bank to establish a branch in
Domestic smaller banks: Offer back‐end banking services for smaller banks that do not
have the staff resources and expertise to perform the service themselves
In both cases, correspondent bank offers services such as:
‐Checks clearing and collection
‐Treasury services: helping in Receivables collection, in payables with products and
solutions for making payments, offering liquidity (working capital) management (invest
firm’s excess cash, or lend them when in shortage of cash)
‐International trade and finance: Manage foreign currency exchange, offer assistance and
guarantees (letter of credit, Cash against docs CAD etc.)
*CAD is a service offered where bank hands out the documents of the merchandise sent
by the supplier to its client, when the client makes the payment (cash).
‐Securities issuances and investments (Underwriting, placement and hedging)
*Both of these services (trust and correspondent services) are sold as a package, and
payment is actually a non‐interest deposit held with the bank offering the services
Their key role is to make sure that banks are following banking laws, rules and
regulations, the proper way !
The Federal Deposit Insurance Corporation (FDIC):
It provides depositors insurance against bank failures (crash) and prevent “bank run“
scenarios, by imposing guarantee programs of insurance with varying degrees of
protection. Only banks and Savings institutions are insured by the FDIC, not CUs (CUs are
instead monitored by the National Credit Union Association NCUA) Premiums are paid
by the member banks themselves (banks that are affiliated to FDIC) to insure the
depositors’ accounts up to a certain limit.
FDIC regulates all banks and savings institutions (national and state level) even those not
state banks not yet affiliated with the Fed (FRS)
The Office of the Comptroller of the Currency (OCC):
It charters, regulates, and supervises national commercial banks, federal (national)
savings institutions, and federal branches and agencies of foreign banks in the U.S. It is
basically the watch dog for all national (federal) banks (commercial and savings), not the
state level banks. It makes sure that they comply to the laws regarding capital
requirement, asset quality (loans and investments), management, earnings, liquidity,
risks sensitivity, information technology, and community reinvestment. It also has the
power to oversee mergers and to close failing banks to restore trust in the American
banking system.
The Federal Reserve System (FRS):
Central bank, bank of banks, regulates monetary and financial system. It helps maintain
stability of the financial system, primary regulator for banks members of the FRS. Offers
Fedwire (electronic platform for FRS members to settle payments) and is lender of last
resort (through bank reserves). It has 12 federal banks across US.
National banks are automatically members of the FRS. State‐chartered banks can elect to
become members.
Since 2010, FRS became the primary regulator for all banks and non‐banks operating in
the US.
The state bank regulators:
Banks can also be chartered (regulated) and supervised by the state regulatory agencies.
The state regulators can regulate at a state level, both state and federal (national) banks,
allowing for a dual banking system (both state and federal)
Office of Thrift Supervision OTS: It is responsible for issuing and enforcing regulations
governing both federal and state‐chartered savings and loan industry (thrifts).
It was however merged with OCC that took over and became in charge of overseeing
savings associations (as seen above)
National Credit Union Association NCUA: FDIC version of CUs. It monitors federal and
state chartered CUs and makes sure they’re insured through the NCUSIF (National Credit
Union Share Insurance Fund)
The McFadden Act (1927)
It allowed state regulators the authority to govern and supervise national bank branches
located within the state. This way national banks can open state branches to compete
with local banks. It is some sort of unification of both state and federal bank regulation.
The Glass Steagall Act (or Banking Act) of (1933)
Separated securities and banking activities, by prohibiting commercial banks from
underwriting securities
Established the FDIC to insure bank deposits
Prohibited banks from paying interest on demand deposits (Regulation Q)
The Bank Holding Company Act (1956) and subsequent amendments
Empowered the Federal Reserve to regulate multibank holding companies
Banks that hold other banks (becoming bank holding companies), cannot still engage in
non‐banking activities (such as securities activities: underwriting, trading,
A bank cannot hold another bank in a different state (interstate restriction)
A bank cannot purchase non‐financial businesses or even purchasing their voting stocks.
Community Reinvestment Act CRA (1977)
Intent of encouraging depository institutions to help meet the credit needs of
surrounding communities (particularly low and moderate income neighborhoods).
Meant to address discrimination and redlining in lending to help meet their credit needs
The International Banking Act (1978)
A legislative act that brought all US located branches of foreign banks and agencies
under the jurisdiction of US banking regulations.
Subjected foreign banks to the McFadden and Glass‐Steagall Acts and gave them access
to Fedwire, the discount window, and deposit insurance.
Depository Institutions Deregulation and Monetary Control Act DIDMCA (1980)
Mainly deregulation acts:
Officially allowed NOW accounts to exist, and lifted the limitation on the number of
checks it can be written
Phased out Regulation Q on savings accounts (previously required under Glass‐Steagall
Act). Banks can since chose the interest rates they can offer to their clients. Reg. It
took 6 years from 1980 to 1986 to gradually eliminate reg. Q
It raised the amount of FDIC insurance protection ceiling from USD 40K to USD 100K per
account (it was again raised after 2008 crisis to USD 250K)
It allowed Credit Unions to offer transaction accounts (checking and savings accounts)
In addition to deregulations, the act requires any bank that accepts deposits to report to
the FRS (Federal Reserve System). That way the Fed has a tighter
control on all acting banks in the system. The bill also opened the Fed discount window
and made reserve requirements mandatory to each and every domestic bank.
(Germain) Depository Institutions Act DIA (1982)
Mainly deregulation acts as well:
Allowed Savings institutions more deposit and lending powers with adjustable rates.,
Allowed offering of money market deposit accounts (MMDAs) with no interest rate
Competitive Equality in Banking Act CEBA (1987)
Redefined bank to limit growth of nonbank banks, by preventing commercial banks from
creating or purchasing non‐banking institutions that offer non‐banking services,
such as: insurance and securities underwriting, investment advisory services, trading in
securities or brokerage, fund pooling. Commercial banks started to acquire
non‐banking institutions and the law came in to prevent that.
It can be seen as a reinforcement of Glass Steagall Act (1933) (regarding separation of
banking and non‐banking services)
with broader more defined boundaries.
Financial Institutions Reform Recovery and Enforcement Act FIRREA (1989)
‐Imposed restrictions on investment activities by savings institutions: less nonresidential
mortgages, divest from junk bonds
‐Imposed qualified thrift lender (QTL) test: A QTL must have at least 65% of its lending
activities spent on residential mortgages (oriented towards individuals so that
can own a house, and the surrounding community will thrive). Then and only then, the
qualified savings bank (not commercial bank) can borrow from the Federal Home
Loan bank (A Fed bank synonymous to Fed reserve bank for commercial banks) at lower
interest rates, to lend the money for residential (home) mortgages.
‐Created Bank Insurance Fund BIF for banks and the Savings Associations Insurance
Fund SAIF specifically for savings institutions, both overseen by FDIC, to separate
bank insurance from thrifts insurance. SAIF has replaced a previously established Federal
Savings and Loan Insurance Corporation FSLIC, While bank insurance was
previously overseen by the FDIC. Recall that since 2006 BIF and SAIF have merged into
DIF (Depository Insurance Fund)
‐Made Office of Thrift Supervision OTS as the new official charter and regulator of
savings institutions, replacing the Federal Home Loan Bank Board
(That’s the board overseeing the Federal Home Loan Bank FHLB that provided loans to
Saving institutions if they keep a QTL level of 65% or more, as mentioned above)
‐Created Resolution Trust Corporation RTC, a special unit to dissolve (close and liquidate)
failed and savings institutions.
FDIC Improvement Act (1991)
Introduced Prompt Corrective Action PCA to deal with bank capital falls: progressive
penalties against banks that show progressive deteriorating capital ratios
Introduced Risk‐based deposit insurance premiums (the higher the risk, the higher the
premium) to avoid previous insurance run outs of cash
Limited “too big to fail” bailouts for large banks.
*FDIC: Federal Deposit Insurance Corporation
Financial Services Modernization Act FSMA (1999)
Repealed Glass‐Steagall barriers between commercial banks and investment banks:
allowed for the creation of a financial services holding company:
A bank can now register as a Financial Services Holding Company and starts offering
non‐banking services besides traditional banking services.
In other words: Banks can now offer brokerage (securities trading), securities and
insurance underwriting, investment consulting and risk management
(recall last table in chapter 1)
Dodd‐Frank Act (2010)
It’s consumer protection act, that was passed in response to 2008 financial crisis, to
insure more accountability and transparency in the financial system and protect
consumers from unfair, deceptive or abusive financial services practices
(Misrepresentation, omission, misleading when communicating about financial services
This act also repelled regulation Q (or specifically the part of the regulation that still
prohibits interest rates on demand deposits). Since 2011, banks can offer demand
(checking) accounts that pay interest. The reason is, to encourage more deposits in
banks, which in turn increases bank liquidity and bank required reserve with the Fed,
which will ultimately protect against liquidity shortage and potential financial crisis.
The Dodd‐Frank Act also made the Fed the primary regulator of all financial institutions
(bank or non‐bank), including the holding companies.
It also abolished the OTS and distributed its responsibilities among the OCC, the FDIC,
and the Fed
savings institutions are depository institutions that specialize in residential mortgages
mostly backed by short‐term deposits and other funds.
Savings institutions comprise two different groups: Savings & Loan Associations (S&L)
and Savings Banks. They usually are grouped together because they are both are
important recipients of household savings and both provide mortgage and lending
services. So they’re basically offering very similar services.
Ownership: 2 different types of ownership:
Mutual ownership: Institution owned by the depositors (Savings and Loans S&L
Stock ownership: Institution structured as a corporation, owned by the stockholders
(Savings Banks)
They’re smaller than commercial banks and are more local in their service areas. Few
are federally chartered (operate on a national level)
Depository Institutions Deregulation and Monetary Control Act DIDMCA 1980 allowed
NOW accounts and removed interest rate ceiling on savings (phasing out Reg. Q).
Germain Depository Institutions Act DIA 1982 allowed savings institutions a higher
lending and deposit ratio.
Financial Institutions Reform Recovery and Enforcement Act FIRREA 1989 established
SAIF as an insurance fund to protect clients deposits, replacing FSLIC (recall that SAIF
later merged with BIF to become DIF). It imposed a QTL test at a min of 65% of funds
(deposits+debt+equity) invested in residential mortgages. It also made OTS new regulator
and supervisor, replacing FHLB board, and created RTC to close insolvent savings
Main activity: As mandated by FIRRERA act, with a QTL test requirement of at least 65%
investment in residential mortgages, Savings institutions have been involved in
area ever since. They’ve been heavily invested in residential mortgages as well as in
mortgage based securities MBSs. They’re also invested in business and consumer
but to a lesser extent. They’re also involved in securities such as T‐bills, bonds,
debentures (unsecured forms of bonds with higher interest rate)
Uses of funds (Assets):
A minimum holding of 65% in mortgage‐related assets (more than commercial banks)
Consumer and business loans are also possible due to the DIA 1982 reform that gave
more lending / borrowing enhancement to savings institutions. However the
rates at
which they invest in those types of loans are still much lower than in commercial banks
Savings institutions are required to hold cash and investment securities for liquidity risk
purposes. However, such investment is far less than in commercial banks.
They’re not
so much looking to make profit, they’re mostly looking to have a safety net, for when
liquidity is needed.
Sources of funds (Liabilities):
‐Individual savings deposits are the predominant source of funds (savings accounts) and
NOW accounts
‐Long‐term borrowing: The second most important source of funds consists of
borrowings from the Federal Home Loan Banks (FHLB), in addition to bonds and
debentures (bonds non secured by physical assets, rely on reputation and
‐Short‐term borrowing: Repos, Fed reserve discount window funds and from other
banks in the Fed fund market
‐Other types: Retail CDs and MMDA
Savings institutions are offering mostly similar products and services to commercial banks
due to recent deregulations. However, commercial banks are more active in some areas
than others compared to savings institutions and vice versa
History: Saving institutions invested heavily in mortgages. They’ve suffered significant
losses during financial crisis from mortgage defaults:
In the 80s, following the first wave of deregulation, many institutions felt more
comfortable making very risky loans and investments. Default of these high risk
combined with adverse interest rate movement at that time by the Fed*, resulted in
heavy losses and bankruptcy. The FSLIC (Federal Savings & Loan Insurance
Corporation) fell short and could not insure all those falls, mainly because the premiums
paid by the institutions to fund the insurance pool were not risk adjusted
(so premiums were not proportional to the risks taken).
That’s why SAIF (Savings Associations Insurance Fund) was established next to take over
and premiums (paid by savings institutions) were adjusted based to the risk
since 1991.
Before the 2008 financial crisis, Savings institutions invested heavily in subprime
mortgages and no doc loans (very unsecured loans that do not require
borrowers to provide
income proof or collaterals to get a loan), which led to major financial trouble. Many
savings institutions have later merged (consolidated) with other savings
institutions and
commercial banks over the years. This explains the shrinking number of savings
institutions over the years. Some notable failures:
Countrywide Financial went bankrupt, then acquired by Bank of America in 08
IndyMac lost most of its USD 32 billion portfolio
Washington Mutual followed an aggressive expansionary strategy, then became known as
the largest depository institution to fail during 08 crisis
*US Recession in early 80s, was caused by the Fed following contractionary monetary
policy (raise the cost of borrowing (interest rates) by reducing money supply) to
inflation. This had some side effects: lower GDP and higher unemployment rate (thus
Countrywide Financial: eliminated every significant checkpoint on loan quality and
started racking up unchecked loans and compensated its employees solely based on the
volume of loans originated, leading to frauds and misrepresentations.
Washington Mutual: Too quick expansion, Focused on housing industry in too many
areas at once (branched out even in bad neighbourhoods)
IndyMac: used to provide safer and more secure loans, rode the real estate boom in 06
Net interest margin: Interest income minus interest expense divided by earning assets.
Disintermediation: Withdrawal of deposits from savings associations and other
depository institutions and their reinvestment elsewhere.
Regulation Q ceiling: An interest ceiling imposed on small savings and time deposits at
banks and thrifts until 1986.
the Federal Reserve’s restrictive monetary policy action led to a sudden and dramatic
surge in interest rates, with rates on T‐bills rising as high as 16 percent. This increase in
short‐term rates and the cost of funds had two effects. First, savings associations faced
negative interest spreads or net interest margins (i.e., interest income minus interest
expense divided by earning assets) in funding much of their fixed‐rate long‐term
residential mortgage portfolios over the period. Second, they had to pay more
competitive interest rates on savings deposits to prevent disintermediation and the
reinvestment of those funds in money market mutual fund accounts. Their ability to do
this was constrained by the Federal Reserve’s Regulation Q ceilings, which limited the
rates savings associations could pay on traditional passbook savings account and retail
time deposits.
Credit unions: Nonprofit depository institutions, owned by members with a common
bond, specializing in small consumer loans.
Credit unions tend to hold higher levels of equity than other depository institutions.
Since CUs are not stockholder owned, this equity is basically the accumulation of past
undistributed profits from CU activities that are “owned” collectively by member
Like savings banks and savings institutions, credit unions can be federally or state
NCUA are the official regulators of federal and state CU.
2/3 of CUs are federal, 1/3 are state level
NCUSIF provides deposit insurance guarantees of up to $100,000 for insured credit
unions. Currently, the NCUSIF covers 98 percent of all credit union deposits