What Is a Thrift Bank?

Thrift Banks Explained

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Thrift banks, also known as savings and loans associations (S&Ls) or thrifts, are primarily funded by consumer deposits. They offer many of the same services as retail or commercial banks, including debit and credit cards and federally insured savings and checking accounts. But they’re usually smaller than national banks like Wells Fargo or Chase Bank, and business loans make up only a small percentage of their business.

The last two major financial crises have affected the thrift banking industry. Thrift banks now offer many of the same services as commercial banks, though they usually specialize in real estate loans. Learn how thrifts compare with commercial banks and how regulations have changed since they were established. 

Definition and Examples of Thrift Banks

Thrift banks are financial institutions funded through consumer deposits that invest in home mortgages and other consumer loans. In fact, thrift institutions are legally required to dedicate 65% of their lending portfolios to consumer loans.

  • Alternate names: Savings and loan associations, thrift institutions, thrifts

By law, a thrift bank can only dedicate 20% of its business to commercial loans and leases.

Thrifts are mainly concerned with lending. Historically, they have made mortgages more accessible to the working and middle classes by offering longer mortgage terms and lower interest rates than commercial banks.

As many banks have consolidated, fewer traditional thrift banks are found in the U.S. today. Cleveland-based Third Federal Savings & Loan is one example.

How Thrift Banks Work

Thrift banks operate similarly to traditional banks: They offer consumer accounts, including checking and savings, as well as debit and credit cards, certificates of deposit, and personal and auto loans. A thrift is either mutual, meaning it is owned by its depositors, or a corporation owned by investors. 

Higher interest rates on deposits draw customers from traditional banks. Thrift banks can offer better interest rates because they borrow funds at a low cost from the Federal Home Loan Bank System.

Since the 2008 financial crisis, however, there is less distinction between thrift and commercial banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act further consolidated regulation of thrift and commercial banks. The Federal Deposit Insurance Corp. (FDIC) continuously monitors the interest rate differential between thrift and commercial banks to determine whether the rates offered by thrift banks will negatively affect the housing market or lending industry.

History of Thrift Banks

Thrift banks originated in the late 18th century as building societies in the U.K. that provided residential mortgages. Savings and loans associations, as thrifts were known at the time, were established in the U.S. to meet the demand for personal savings accounts and home mortgages. The Philadelphia Savings Fund Society was established in the U.S. in 1816.

The 1932 Federal Home Loan Bank Act provided funds for government-sanctioned S&Ls to borrow and extend mortgages to low- and moderate-income families. Up until the Savings & Loan Crisis in the 1980s, thrift banks’ main assets were fixed-rate home mortgages.

Rising interest rates and loosened regulations led to the crisis in the 1980s and 1990s. Net-worth requirements for thrift bank investments were decreased and thrift institutions made risky investments, resulting in a discrepancy between bank assets and liabilities, or obligations. Ultimately, many thrift banks failed and were liquidated by the now-defunct Federal Savings & Loan Insurance Corp. (FSLIC).

From 1980 to 1988, the number of failed U.S. S&Ls jumped from 11 to 190.

In 1989, President George H.W. Bush signed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), which established the Office of Thrift Supervision (OTS) to oversee thrift banks and provide coverage and regulation under FDIC. The act also reinstated higher net-worth requirements for the institutions and abolished the Federal Home Loan Bank Board (FHLBB) and FSLIC. This centralized the regulation of thrift banks to align with that of commercial banks.

Thrift Banks vs. Commercial Banks

Unlike commercial banks that offer financial services to businesses, thrift banks primarily offer consumer accounts and loans. They are typically small boutique banks in comparison with large, national banks with many branches. Commercial loans make up only a small percentage of their business.

Thrifts and traditional banks offer similar types of accounts, like checking and savings. At each type of institution, deposits are guaranteed by the FDIC up to $250,000 per depositor.

Because thrift banks can borrow at a low cost from the Federal Home Loan System, accounts yield higher interest for depositors.

What Are Mutual Savings Banks?

Many thrift banks are also mutual savings banks, meaning that account holders are also shareholders with a stake in how the bank is managed. Mutual banks are similar to credit unions, or members-only nonprofits that offer financial services as banks do. 

The main difference between mutual savings banks and credit unions, however, is that mutual banks are for-profit. Credit unions pay members dividends, while thrift and mutual savings banks pay interest on deposits.

Key Takeaways

  • Thrift banks offer residential mortgages and other consumer loans and are mostly funded by customer deposits.
  • Increasingly, thrift banks are offering the same services as commercial banks, creating less of a distinction between the two.
  • Thrift institutions are either mutual, meaning owned by their depositors, or they are a corporation owned by investors.