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Introduction
Nonbank financial institutions play a vital role
in the flow of money and credit within the
financial system, especially the home
mortgage market and the market for personal
savings.
Recently however, both bank and nonbank
financial institutions are converging in terms
of the services they offer and the markets they
serve.

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Savings and Loan Associations


Savings and loan associations (S&Ls) are
among the largest of all thrift institutions,
accepting deposits and extending loans and
other services primarily to household
customers.
S&Ls emphasize longer-term loans, especially
mortgage loans.

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Savings and Loan Associations


S&Ls began essentially as a single-product
industry in the early 19th century, accepting
savings deposits from middle-income
individuals and families and lending those
funds to home buyers.
Later, competition from other financial
institutions, deregulation, and many failures,
forced S&Ls to diversify their operations and
aggressively solicit new customers.

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Savings and Loan Associations


The sharp decline that followed was the result
of large numbers of failures and the conversion
of some S&Ls into other kinds of financial
institutions, most notably commercial banks
and savings banks.

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Savings and Loan Associations


One primary cause for the low profitability of
S&Ls during the 1980s and 1990s was that
many S&L assets (fixed-rate mortgage loans)
were interest-rate insensitive while most of
their liabilities (deposits) were highly sensitive
to interest rates.
So, during periods of rapidly rising market
interest rates, the industrys net interest margin
were severely squeezed.

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Savings and Loan Associations


S&Ls need
sound diversification decisions,
carefully managed loan portfolios,
risk management, and
further relaxation of government regulations.

Today, more aggressive S&Ls are branching


out in at least three different directions real
estate models, family financial centers, and
diversified models.

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Savings Banks
Savings banks began in Scotland in the early
19th century, and then took root in the U.S.
about 150 years ago to meet the needs of the
small saver.
Like S&Ls, they play an active role in the
residential mortgage market. However, they
are more diversified in their investments,
purchasing corporate bonds and common
stock, making consumer loans, and investing
in commercial mortgages.

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Savings Banks
The number of savings banks operating today
is small at most a few hundred.
They are scattered throughout the U.S., though
they are most prominent in the New England
and the Middle Atlantic states.
The distinction among S&Ls, savings banks,
and commercial banks is becoming blurred,
especially because they are readily convertible
from one form to another.

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Savings Banks
The savings bank industry faces a number of
problems that will significantly affect its
future as a conduit for savings and investment.
In particular, savings banks have inflexible
asset structures and face competition from
other financial institutions.
Their future growth depends on their ability to
gain the necessary changes in government
regulations to allow them to respond to
changing financial market conditions.

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Credit Unions
Credit unions are cooperative, self-help
associations of individuals, and savings
deposits and loans are offered only to members
of each association.
Credit unions came to the U.S. in 1909, and
their long-run survival stems mainly from their
being able to offer low loan rates and high
deposit interest rates and from their relatively
low operating costs.

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Credit Unions
Credit unions are organized around a common
affiliation or bond among their members. Most
members work for the same employer, or for
one of a group of related employers.
There is a strong shift today toward fewer, but
larger, credit unions. The decline is due
primarily to mergers, failures, and a structural
shift in the U.S. economy from manufacturing
industries toward more service industries.

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Credit Unions
U.S. credit unions are under intense pressure
to develop new services and penetrate new
markets due to increasing competition from
other financial institutions and a decline in the
demand for their historically most important
credit service automobile loans.
However, the industry has repeatedly shown
its capacity for service innovation and its
ability to compete successfully for both
consumer loans and savings accounts.

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Money Market Funds


In 1972, the first money market mutual fund
a financial intermediary pooling the savings of
individuals and businesses and investing those
monies in short-term, high-quality money
market instruments opened for business.
The fund offered share accounts whose yields
reflect prevailing money market rates. In
contrast, the interest rates on most bank
deposits were then restrained by government
regulation.

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Money Market Funds


On the whole, money market funds hold highquality assets. The short maturity of the assets
results in a highly liquid security portfolio that
can be adjusted quickly to suit changing
market conditions.
They are mostly no load funds there is no
commission charge for opening an account,
purchasing more shares, or redeeming shares.
The accounts can be accessed easily too.
Data Source: Board of Governors of the Federal Reserve System

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Money Market Funds


Today, money market funds serve as
cash-management vehicles where market rates can
be earned on funds used for daily transactions;
tax-sheltering vehicles (when tax-exempt funds
are chosen);
a temporary repository for liquid funds; and
a safety haven for savings.

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Money Market Funds


However, note that money market fund share
accounts are not government insured.
The differential between the yield on the
accounts and the rate of return on money
market deposits at banks has also narrowed in
recent years.

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