WaMu has been in the news lately, and several reports have mentioned that they were the largest Savings & Loan before they collapsed. So, besides the name of a financial crisis in the 80′s, what the #$%@$ is a Savings & Loan? This will be long, but since the majority of our posters and readers work in banking, I thought there was a chance y’all would find this interesting.

So again, what the #$%@$ is a Savings & Loan? Well, to answer, we have to go way back. Ready? Good.

Simply put, a Savings & Loan is a type of bank. It takes deposits from people and pays them interest to hold onto it, then uses the money to loan to others at an interest rate higher than they pay on the savings accounts.

The first Savings & Loan type institution was created in Philadelphia in 1816. They were pretty common by the 1830′s. I’m not sure when the term “Savings & Loan” became widespread. In those days, the people who had savings at the bank got a say in how the bank was run. Kind of like a Credit Union today, except at a Credit Union, each member gets one vote, and at the S&L, your influence was based on how much $ you had in the bank. Some S&Ls still operate that way, but larger institutions like WaMu obviously don’t.

Before the Great Depression, most mortgages were not written the way that they are today. They were made mostly by insurance companies, for one, and they used tactics like the interest only loan (to keep people in dept perpetually) or the balloon payment (one huge payment of principal due at the end of the loan that most people couldn’t pay.) These were not good for homeowners. As an aside, could you imagine writing your mortgage check to the evil insurance company each month? The only thing worse would be writing that check to Comcast.

Anyway, in 1932, the government created some government run entities that made money available for amortized mortgages. As a result many more of these S&Ls popped up. At the time, S&Ls were allowed to pay more in interest than a commercial bank, as a way to encourage people to put their money there, which would make more money available for mortgages, which was a good thing.

But the modern era came upon us, and that brought widespread adoption of checking accounts. S&Ls, unlike commercial banks, were not allowed to issue checking accounts until around 1980. This caused some banks to abandon the S&L charter and opt for the National Bank charter instead.

Throughout the 80′s regulations changed, and the types of banks and what they were allowed to do all kind of mixed together. In the 90′s the walls came down further, and there was no longer a restriction on “regular” banks getting involved in investment type activity. This lead to the mega banks we see today like JPMorgan Chase. At this point in time, most types of banks can make loans to businesses or individuals, issue credit cards, get involved in investments like mutual funds and IRAs, and offer savings and checking accounts.

But today, distinctions remain. For instance, S&Ls are regulated by The Office of Thrift Supervision, and a National Bank (like TCF or US Bank) is regulated by The Office of the Comptroller of the Currency (OCC). Both types of institutions are now insured by the FDIC, but S&Ls are technically insured through the Savings Association Insurance Fund (SAIF) , a remnant of the Federal Savings and Loan Insurance Corporation (FSLIC), an FDIC like entity that was just for S&Ls. The SAIF has been administered by the FDIC since 1989.

The FDIC lists several types of bank charters, which helps explain things a little.

So, that’s what I know. And now you know it too if you read this far.

Source: Wiki page on S&Ls and Credit Unions, and various government websites.