Difference Between Bank and Thrift
A number of financial institutions have started operating in the global market to facilitate the public by offering unique products and packages. This systematic growth in the financial sector has given rise to a lot of effective tools that were not available to the users before. If you look at the American economy, apart from commercial banks, you would also find thrifts that include savings banks and savings and loan associations. Although, thrifts are not as common as they used to be in the past, they are still a crucial part of the financial service sector in the United States.
As you all know, banks are financial institutions that receive cash deposits and issue loans along with the provision of other financial services that include wealth management, safe deposit boxes and currency exchange. The two common types of banks are investment and commercial banks, and they are governed by either central bank of a country or the national government. Commercial banks get insurance for their deposit from the Federal Deposit Insurance Corporation (FDIC) via Bank Insurance Fund (BIF).
Commercial banks are responsible for receiving the deposit, giving short term loans to businesses and entrepreneurs, and issuing instruments, such as, certificate of deposits. Some commercial banks also have brokerage divisions that enable the banking customers to invest their funds in stock, and there are some banks that operate trust companies or divisions that are involved in the management of business or personal trusts. Whereas, investment banks primarily focus on offering services, such as, underwriting or assistance with M&A (Merger and Acquisition).
With the new era of technology, a large number of commercial banks now operate online where all the financial transactions are executed electronically. The virtual banks generally pay more interest to their depositor and charge a lower fee for the services offered to customers.
Thrifts are financial institutions and their main purpose is to take money and derive home mortgages in order to facilitate funding of family homes for working class individuals. As already discussed, it includes savings and loan (S&L) associations. They are relatively smaller in size and their primary focus is on providing services to their customers, for example, they offer checking accounts along with other services, such as, auto loans, credit cards, and personal loans.
The history of Thrift goes back to the 18th century with the inception of ‘building societies’ in the UK. It was initiated to move the issuance of mortgage loan away from insurance companies and into the banking sector. The structure of Thrift banks is similar to corporate firms where the ownership lies with the shareholders. After the 1980’s savings and loan crisis that resulted in the failure of Thrift banks and following the Dodd-Frank Act that put an end to their less strict regulations, these banks underwent structural changes that reduced the differences between these financial institutions and conventional banks.
In 1989, Congress started breaking down the differences between conventional and thrift banks. As a result, much of the thrift industry has been absorbed in the mainstream banking industry. According to a research conducted by the economic expert, Bert Ely, regulatory and statutory changes have almost blurred the differences between both the financial institutions, and he believes that thrift will eventually cease to exist. However, it should be noted that they are not the same as conventional banks, and still, there are differences between the two.
Limitation to offer Products
Conventional banks offer services to both individuals and businesses, whereas, thrifts serve only consumers rather than the small or large businesses. Moreover, thrift banks are required to have 65 percent of their portfolio consisting of consumer loans. Also, they can give around 20 percent of their assets out for commercial loans, and only a half of it can be used for small business loans. Commercial banks do not have any of these restrictions.
Higher Yield and Liquidity
Unlike conventional banks, thrifts typically have access to lower cost funding from Federal Home Loan Banks and hence, are charged a low rate of interest. It enables them to provide a higher yield to customers with savings accounts. Furthermore, they have high liquidity to offer home mortgage loans as compared to conventional banks.
Range of Products
Banks offer a range of accounts in terms of wealth management, insurance schemes, foreign exchange, etc., and a large number of products are available for the public to choose the one that is suitable for their financial goals. All in all, conventional banks are like a one stop shop for financial services where a customer can find a range of products. On the other hand, thrift banks offer only a few type of accounts and their products are a lot simpler, which doesn’t require a lot of management.
For commercial banks, the charter is issued by federal or state government and the stockholders of the bank can decide which one of the two is reasonable keeping in mind their growth prospects. The charters of the national banks are issued by a division of the United State Treasury called the Office of the Comptroller of the Currency. Commercial banks are allowed to trade a state charter for a federal one. On the other hand, the charter for a thrift bank is issued by either the Federal office of Thrift Supervision or it can be issued by the financial regulatory division of a state government.
Individuals who seek to launch a chartered savings and loan association typically have two ownership options; the owner can be either a depositor or borrower or shareholders controlling the S&L’s charter stock can also establish a thrift. It is also referred to as a mutual ownership. But banks, on the other hand, offer their services as national or regional businesses and are run by the board of directors that are appointed by the stockholders. Therefore, borrowers and depositors cannot have an ownership of conventional banks.
The funding mechanism of thrift and conventional banks is also different. Thrift mainly gets its funding from the savings that are deposited by individuals and local businesses for which they are paid interest; this is similar to the building societies in the United Kingdom and Australia. As already mentioned, thrifts are very small as compared to conventional banks. They operate locally and so, do not get their funding from a money market or private equity. Instead, the money collected from the local community is basically lent as personal loans or mortgages. Whereas, conventional banks behave in a free manner as compared to the thrift banks, especially after the Glass-Steagall Act of 1932, as this act doesn’t require retail banks to be considered separate from investment banks.
Thrift institutions were established in the 1850s under federal control of the United States. Therefore, they are more regulated as compared to the conventional banking system. Since they are required by law to have at least 65 percent of their lending in mortgages, it makes them vulnerable to any downturn in the housing sector. However, during the credit crunch of 2008, they turned out to be quite strong as they didn’t get exposure to the debt that commercial banks had on their books, and hence, they were not hard hit by the crisis as conventional banks did.
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