Tài chính doanh nghiệp - Chapter 21: Thrift operations

Chapter 21Thrift OperationsFinancial Markets and Institutions, 7e, Jeff MaduraCopyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.1Chapter OutlineBackground on savings institutionsSources and uses of fundsExposure to riskManagement of interest rate riskValuation of a savings institutionInteraction with other financial institutions2Chapter Outline (cont’d)Participation in financial marketsPerformance of savings institutionsSavings institution crisisBackground on credit unionsSources and uses of credit union fundsCredit union exposure to riskRegulation of credit unions3Background on Savings InstitutionsSavings institutions include savings banks and S&LsS&Ls are the most dominant typeSavings institutions are mainly concentrated in the NortheastThe insuring agency for S&Ls is the Savings Association Insurance Fund (SAIF)The insuring agency for savings banks is the Bank Insurance Fund (BIF)Both agencies are administered by the FDICSavings banks and S&Ls are very similar in their sources and uses of funds4Background on Savings Institutions (cont’d)5Background on Savings Institutions (cont’d)OwnershipMost SIs are mutual (owned by depositors)Many SIs have shifted their ownership structure from depositors to shareholders through mutual-to-stock-conversionsAllow SIs to obtain additional capital by issuing stockProvide owners with greater potential to benefit from performanceMake SIs more susceptible to hostile takeovers6Background on Savings Institutions (cont’d)Ownership (cont’d)In an acquisition, both SIs have to be stock-ownedMerger-conversionThe number of SIs today is about one-half of the number in 1994The total assets of stock SIs has increased by more than 60 percent since 1994The total assets of mutual SIs has remained steady since 19947Background on Savings Institutions (cont’d)Regulation of savings institutionsRegulated at both the state and federal levelFederally chartered SIs are regulated by the Office of Thrift Supervision (OTS)State-chartered SIs are regulated by the state that has chartered themRegulatory assessment of SIsRegulators conduct periodic onsite examinations of capital and riskMonitoring is conducted using the CAMELS ratingDeregulation of servicesRecently, SIs have been granted more flexibility to diversify products8Sources of FundsDepositsMost funds come from savings and time deposits such as passbook savings, CDs, and MMDAsSince 1981, SIs are allowed to offer NOW accounts as a result of DIDMCASince 1982, SIs are allowed to offer MMDAs as a result of the Garn-St Germain ActSince 1978, SIs are allowed to offer retail CDs with rates tied to Treasury bills9Sources of Funds (cont’d)Borrowed fundsSIs can borrow from other depository institutions in the federal funds marketSIs can borrow at the Fed’s discount windowSIs can borrow through reposCapitalThe capital (net worth) of SIs is composed of retained earnings and funds obtained from issuing stockSIs are required to maintain a minimum level of capital10Uses of FundsCashSIs maintain cash to satisfy reserve requirements and accommodate withdrawal requestsMortgages:Are the primary asset of SIsTypically have long-term maturities and can be prepaid by borrowersAre mostly for homes or multifamily dwellingsAre subject to interest rate risk and default risk11Uses of Funds (cont’d)Mortgage-backed securitiesSIs issue securities backed by mortgagesCash flows to holders of these securities may not be steady because of prepaymentOther securitiesAll SIs invest insecurities such as Treasury bonds and corporate bondsProvide liquiditySome thrifts invested in junk bonds prior to 198912Uses of Funds (cont’d)Consumer and commercial loansFederally chartered SIs are allowed to invest up to 30 percent of their assets in nonmortgage loans and securities10 percent can be used to provide non-real estate commercial loansMaturities typically range from one to four yearsSubstituting loans for mortgages reduces interest rate risk but increases credit riskOther uses of fundsReposLending in the federal funds market13Uses of Funds (cont’d)14Exposure to RiskLiquidity riskSIs commonly use short-term liabilities to finance long-term assetsIf new deposits are not sufficient to cover withdrawal requests, SIs can experience liquidity problemsSIs can obtain temporary funds through repurchase agreements or in the federal funds marketCredit riskConventional mortgages are the primary source of credit riskSIs often carry the risk rather than paying for insuranceMany SIs were adversely affected by the weak economy in 2001–200215Exposure to Risk (cont’d)Interest rate riskMany SIs were hurt by rising interest rates in the 1980s because of their heavy concentration on fixed-rate mortgagesMany SIs benefited from their exposure to interest rate risk in the 2001–2002 period when interest rates declined16Exposure to Risk (cont’d)Interest rate risk (cont’d)Measurement of interest rate riskSIs commonly measure the gap between rate-sensitive assets and liabilities to determine interest rate risk exposureGap measurement is dependent on the criteria used to classify an asset or liability as rate sensitiveSome SIs measure the duration of assets and liabilities to determine the imbalance in sensitivity of interest revenue versus expenses17Management of Interest Rate RiskAdjustable-rate mortgages (ARMs)The interest rate on ARMs is tied to market-determined rates and are periodically adjustedARMs enable an SI to maintain a more stable spread between interest revenue and interest expensesARMs reduce the adverse impact of rising interest rates and the favorable impact of declining interest rates18Management of Interest Rate Risk (cont’d)Interest rate futures contractsAllows for the purchase of a specific amount of a particular financial security for a specified price at a future point in timeSome SIs use T-bond futures because they resemble fixed-rate mortgagesSelling T-bond futures effective hedges fixed-rate mortgagesIf interest rates rise, the market value of the securities represented by the futures contract will decreaseSIs benefit from the difference between the market value at which they purchase the securities in the future and the futures price19Management of Interest Rate Risk (cont’d)Interest rate swapsAllows an SI to swap fixed-rate payments (outflow) for variable-rate payments (inflow)Fixed-rate outflows can be matched against fixed-rate mortgages heldVariable-rate inflows can be matched against the variable cost of fundsBeneficial in a rising rate environment20Management of Interest Rate Risk (cont’d)Conclusions about interest rate riskAlthough strategies are useful, it is virtually impossible to completely eliminate interest rate riskMortgages may be prepaid21Valuation of a Savings InstitutionThe value should change in response to changes in its expected cash flows and to changes in the required rate of return:22Valuation of a Savings Institution (cont’d)Factors that affect cash flowsChange in economic growthDuring periods of strong economic growth:Consumer loan and mortgage loan demand is higherLoan defaults are reduced23Valuation of a Savings Institution (cont’d)Factors that affect cash flows (cont’d)Change in the risk-free interest rateSIs’ cash flows are inversely related to interest rate movementsSIs rely heavily on short-term depositsSIs’ assets commonly have fixed ratesChange in industry conditionsSIs are exposed to regulatory constraints, technology, and competition24Valuation of a Savings Institution (cont’d)Factors that affect cash flows (cont’d)Change in management abilitiesManagers can attempt to make internal decisions that will capitalize on the external forces that the bank cannot controlSkillful managers will recognize how to revise the composition of the SI’s assets and liabilities to capitalize on existing economic or regulatory conditions25Valuation of a Savings Institution (cont’d)Factors that affect the required rate of return by investorsChange in the risk-free rateWhen the risk-free rate increases, so does the return required by investors:26Valuation of a Savings Institution (cont’d)Factors that affect the required rate of return by investors (cont’d)Change in the risk premiumWhen the risk premium increases, so does the return required by investors:27Interaction with Other Financial InstitutionsType of Financial InstitutionInteraction with Savings InstitutionsCommercial banks Compete with banks in attracting deposits and providing consumer and commercial loansHave merged with banks in recent yearsSell mortgages to commercial banksFinance companiesCompete with finance companies in providing consumer and commercial loansMoney market mutual fundsCompete with money market mutual funds in attracting short-term depositsInvestment companies and brokerage firmsContact investment companies to engage in interest rate swaps and capsHave made arrangements with brokerage firmsInsurance companiesInsurance companies sometimes purchase mortgages sold by SIs28Participation in Financial MarketsType of Financial MarketParticipation by Savings InstitutionMoney marketsCompete with other institutions for short-term depositsBond marketsPurchase bonds for their investment portfoliosIssue bonds to obtain long-term fundsMortgage marketsSell mortgages in the secondary market and issue mortgage-backed securitiesFutures marketsHedge against interest rate risk by taking positions in interest rate futuresOptions marketsHedge against interest rate risk by purchasing put options on interest rate futuresSwap marketsHedge against interest rate risk by engaging in interest rate swaps29Performance of Savings InstitutionsThe difference between interest income and interest expenses has fluctuated in recent yearsThe loan loss provision has declined since 2001Noninterest income has increasedNoninterest expenses have increased30Performance of Savings Institutions (cont’d)Comparison of factors that affect the performance of SIs and commercial banksLoan loss provisions are typically much lower for SIs than for commercial banksSIs earn substantially less noninterest income than commercial banksNoninterest expenses are lower for SIs than for commercial banks31Savings Institution CrisisNumerous SIs became insolvent during the late 1980sCongress enacted the FIRREA in 1989Reasons for failureIncrease in interest expensesInterest rates increased in the late 1980s, affecting SIs with long-term mortgages negatively32Savings Institution Crisis (cont’d)Reasons for failure (cont’d)Losses on loans and securitiesCrisis was precipitated by unpaid loansMajor loan losses were in commercial real estateSIs were forced to assume real estate holdings that were sometimes worth less than half the loan amount originally providedFraudMost commonly, managers used depositors’ funds for purchases of personal assets33Savings Institution Crisis (cont’d)Reasons for failure (cont’d)IlliquiditySIs experienced a cash flow deficiency as a result of loan lossesSIs were forced to offer higher interest rates on deposits to attract more fundsThe FSLIC was experiencing its own liquidity problems, exacerbating the liquidity problem34Savings Institution Crisis (cont’d)Provisions of the FIRREAThe FSLIC was terminatedSIs were required to have $1.50 in tangible capital per $100 of depositsThe FHLBB was replaced by the OTSThe RTC was created to deal with insolvent SIsThe penalties for officers of SIs and other institutions were increased for fraudSIs were required to use 70 percent of their assets for housing loans35Savings Institution Crisis (cont’d)Creation of the RTCThe RTC was formed to deal with insolvent SIsLiquidated assets and reimbursed depositors or sold the SI to another institutionSIs were processed based on their size, health, and sales potentialThe most popular method for handling failures was the deposit transferDeposits of failed SIs were transferred to an acquiring firm for a fee36Savings Institution Crisis (cont’d)Impact of the bailoutStronger capital positionsMany SIs are now required to maintain a higher minimum level of capitalHigher asset qualitySIs have been forced to maintain more conservative asset portfoliosMore consolidationFIRREA allows commercial banks and other institutions to purchase failing or healthy SIs37Savings Institution Crisis (cont’d)Performance since the FIRREAROA became positive in 1991 and has increased since thenCapital ratio has increased substantially since 1989The number of SI failures has declined to less than 12 in each of the last several years38Background on Credit UnionsCredit unions are nonprofit organizations composed of members with a common bonde.g., labor union, church, universityCUs accept deposits from members and channel funds to those members who want to finance the purchase of assets39Background on Credit Unions (cont’d)Ownership of credit unionsCUs are technically owned by depositorsDeposits are called shares, which pay dividendsCUs’ income is not taxedCUs can be federally or state charteredFederal CUs are growing at a faster rateMost CUs are very small40Background on Credit Unions (cont’d)Advantages and disadvantages of credit unionsCan offer attractive rates to their membersNoninterest expenses are relatively low because much of their assets is donatedVolunteer labor may not have the incentive to manage operations efficientlyCommon bond requirements restrict a given CU’s growthMany CUs are unable to diversify geographicallyCUs have increasingly been merging41Sources and Uses of Credit Union FundsSources of fundsMostly from share deposits by membersEither share deposits, share certificates, or share draftsFor temporary funds, CUs can borrow from other CUs or from the Central Liquidity Facility (CLF)Acts as a lender similar to the Fed’s discount windowCUs maintain capital, primarily in the form of retained earningsUses of fundsThe majority of funds is used for loans to membersSome CUs offer long-term mortgage loansCUs purchase government and agency securities42Credit Union Exposure to RiskLiquidity riskCUs can experience liquidity problems when an unanticipated wave of withdrawal occurs without an offsetting amount of new depositsCredit riskCUs concentrate on personal loans to membersMost loans are securedCUs with very lenient loan policies could experience losses43Credit Union Exposure to Risk (cont’d)Interest rate riskMaturities on consumer loans are short term, causing assets to be rate sensitiveMovements in interest revenues and interest expenses are highly correlatedThe spread between interest revenues and interest expenses remains stable over time44Regulation of Credit UnionsSupervised and regulated y the National Credit Union Administration (NCUA)Employs a staff of examiners to monitor CUsCUs complete a semiannual call report that provides financial informationNCUA examiners derive financial ratios that measure the financial condition of the CUCriteria used to assess risk are CAMELS45Regulation of Credit Unions (cont’d)Regulation of state-chartered credit unionsRegulated by their respective statesProducts offered are influenced by the type of charter and their locationInsurance for credit unions90 percent of CUs are insured by the National Credit Union Share Insurance Fund (NCUSIF)Some states require their CUs to be federally insured46