Federal Savings and Loan (S&L): What it is, How it Works

What Is a Federal Savings and Loan (S&L)?

The term federal savings and loan (S&L) refers to a financial institution that focuses on providing checking and savings accounts, loans, and residential mortgages to consumers. These institutions are also referred to as thrifts—credit unions and savings banks that are mutually owned by their customers. As such, many of these companies are community-based and privately owned, although some may also be publicly-traded.

How a Federal Savings and Loan (S&L) Works

The majority of today's federal savings and loans are federally-chartered community-based institutions. Unlike commercial banks, they are owned and controlled by their customers—not by shareholders. As noted above, they focus on providing residential mortgages, loans, and basic banking and savings vehicles—checking and savings accounts, certificates of deposit (CDs), and others—to customers. These members pay dues that are pooled together, giving them better rates on credit and savings products.

The concept of federal savings and loans or thrifts are rooted in the building and loan associations that were prominent before the Great Depression. Many of these building and loan associations relied largely on a share-accumulation model whereby members committed to buying shares in the association and subsequently had the right to borrow against the value of those shares in order to purchase a home.

When many of these institutions began to struggle during the Depression, the Hoover and Roosevelt administrations stepped in to overhaul the industry. The government provided charters for federal savings and loans and established the Federal Home Loan Banking (FHLB) system to ensure that these new—or, at least, rebranded—lenders had sufficient liquidity.

At the time, deposits in federally chartered S&Ls were insured by the new Federal Savings & Loan Insurance Corporation (FSLIC), which aimed to provide depositors with the assurance that they would not take on losses. Following the industry's overhaul in 1989, the responsibility to insure deposits fell on the Federal Deposit Insurance Corporation (FDIC). As of June 2022, there were 593 FDIC insured savings institutions.

Special Considerations

The post–World War II boom marked the peak of the thrifts’ influence, with the total number of S&Ls reaching 6,071 by 1965. Congress limited the interest rates that S&Ls and commercial banks could place on depository accounts in 1966, threatening that growth. When interest rates rose in the 1970s, consumers began withdrawing their funds and putting them into accounts that offered a higher yield. Moreover, a stagnant economy meant that thrifts had fewer borrowers who could qualify for a loan.

Legislators passed laws to deregulate S&Ls in the early 1980s. They now had the ability, for example, to offer a broader range of products and use less-restrictive accounting procedures. But rather than alleviating the thrifts’ problems, the laws seemed to contribute toward multiple cases of mismanagement and fraud later in the decade. By 1990 the government estimated that S&L misconduct cost the American public as much as $75 billion.

The government reestablished stronger oversight and created the Office of Thrift Supervision in 1989 in response to the savings and loan crisis. This regulatory body, itself a division of the Treasury Department, helped to ensure the safety and stability of member savings and loans. It was dissolved in 2011 and its functions were subsumed into other agencies. While S&Ls survived the crisis, their prevalence has dwindled significantly since their zenith in the 1960s.

Federal Savings and Loans (S&Ls) vs. Commercial Banks

Federal savings and loan businesses are operated in one of two ways. Under the mutual ownership model, an S&L is owned by its depositors and borrowers. An S&L can also be established by a group of shareholders who own all the shares in the thrift.

This is different from commercial banks, which are typically owned and managed by a board of directors chosen by stockholders. Commercial banks are also more diversified in terms of the offerings they provide. Much of their lending is geared toward businesses and construction projects. They also often provide a broader array of services to consumers, such as credit cards and wealth management solutions.

By contrast, S&Ls are much more focused on the residential mortgage market. By law, they can only lend up to 20% of their assets for commercial loans. In addition, to qualify for Federal Home Loan Bank lending, S&Ls must show that 65% of their assets are invested in residential mortgages and other consumer-related assets.