Whatever happened to the good old-fashioned Savings & Loan? (and how we could bring it back)
Nothing says the holiday season quite like watching “It’s a Wonderful Life”. And of course, in the movie, the main character George Bailey is tied down in life by the anchor of a family business that he can’t escape: The Bailey Brothers Savings & Loan.
In many ways, the movie actually revolves around the savings & loan. It is the primary cause of George’s dissatisfaction with life, as taking over the business from his father keeps him from realizing his dreams to travel the world. Then later on during the stock market crash, he must spend all of his savings (that were supposed to go towards a once-in-a-lifetime honeymoon trip) just to keep the doors open.
But at the same time, the savings & loan ends up being his redemption as it shows him how much of an impact his life has actually had on his friends, family, and community. Without the savings & loan, many of his friends and neighbors would be forever stuck renting expensive shacks from the local slumlord Mr. Potter.
As an ex-banker, I’m always taken by how much of the story actually revolves around banking and the impact it can have on a community. And in the age that we live, where we have so much well-justified anger and frustration with the major banks, I always think: what happened to the savings & loans that were actually helping people get ahead rather than banks ripping them off?
It seems like today, all of the George Bailey’s have lost and Mr. Potter has won over and over and over again.
But maybe, in this world where globalization has sucked the lifeblood out of so many small towns like the fictional Bedford Falls, a return to the good old-fashioned savings & loans may be just what we need.
And maybe, with the changes in financial technology, we are at a place where the savings & loan could be re-imagined to once again be pillars of the local community and actually have a positive impact.
But first, we need to understand how we got from George Bailey’s glory days to the remnants of savings & loans today.
The rise of the savings & loan
The savings & loan was born out of the industrial revolution in the UK and the US, where people of modest means would make regular payments into a fund over time. These funds would then be pooled together and loaned back to members of the organization in the form of housing mortgages.
The concept saw major growth as cities and industry expanded in the late 1800s and early 1900s as more and more workers needed housing close to their increasingly industrial jobs.
The savings & loans had a couple of key advantages over banks that played a large part in their growing popularity:
1 . S&L’s actually invented the amortizing mortgage. If you went to a bank, you would just pay the interest on that loan until the loan was due to be paid back, then you would have to pay the entire amount all at once. The S&L’s were actually the first place where you could take out a loan where you gradually repaid the principle over time.
2. S&L’s had longer time horizons than banks. A bank loan would generally be for 5 years or less — these mainly catered towards the wealthy, as you could imagine it would be a pretty tall order for a working-class factory worker to save the total value of their house in that short of time. S&Ls, on the other hand, could offer their amortizing loans over time periods of 10 years or more. As a trade-off, Savings and Loans required 30-day notice periods to withdraw money, while banks offered checking / current accounts where you could take your funds out at any time.
3. Savings and Loans were small, community-owned organizations with a mission. The large banks of the time were owned by large industrialists (think J.P. Morgan) and were pretty unscrupulous: offering attractive up-front prices but with hidden clauses that charged large fees or penalties later. (sound familiar?) Savings & loans, on the other hand, were owned by their members that contributed funds and saw themselves as vital to the social fabric by everyone in their community to buy their own home.
Think back to “It’s a Wonderful Life” here — it actually is a pretty spot-on picture of how it was then! Savings & loans at the beginning were actually a movement of George Baileys in small towns all over the US, who believed that their community should have a trusted alternative to Mr. Potters (or J.P. Morgan’s) of the world.
But where is George Bailey and his savings & loan now that we have more Mr. Potter’s than ever before?
The decline
You may be thinking that there must have been some large event that killed off the savings & loans, like the crash of 1929 that almost sinks the Bailey Brothers Savings & Loan in the movie.
But actually, the traditional savings & loans held up much better than banks during the crash of the 1920s and the subsequent Great Depression. (due to the time limits on withdrawing funds, a run on a savings & loan was more unlikely than on a bank)
Their decline is actually a more complicated story of changing consumer preferences, competition, de-regulation, and fraud, that went a little something like this:
- In the years following World War II, the booming US economy led to massive Savings & Loan Growth. This growth led S&L’s to expand in two ways that were different from their original model: They no longer were just lending money for mortgages, but for a wide variety of consumer products. (think the washing machine and big car that everyone was promised in the 1950’s) And they became big in size. Many of the largest savings & loans became large enough to rival nationwide banks. And the largest of these were no longer owned by members of their community, but instead issued stock on public markets.
- This growth in size led to competition and consolidation. Around the late 1950s, the larger savings & loans took advantage of their size in order to acquire their smaller competitors or offer very competitive pricing that pushed them out of business. From then on, the number of S&Ls consistently dropped year on year, even as the industry continued to expand in terms of total assets. In other words, the number of S&Ls was going down, while the biggest S&Ls were getting bigger.
- With a little help from de-regulation, the largest S&Ls became indistinguishable from banks. In the 1970s and 1980s, the high-interest rate environment made operations difficult for traditional savings and loans. They had old mortgages on their books at low fixed interest rates but consumers were able to get higher interest rates on their savings elsewhere. Essentially they were not able to make money in their traditional business of selling mortgages with interest rates at 10% and higher. The response from regulators was to remove restrictions on the products that they could offer and at what rates and they reduced the amount of supervision that they were under.
- And finally, like the banks they had become, they took a bunch of bad risks and committed some fraud. With no more restrictions on the lending products they could offer, the largest savings & loans were really S&L’s in name only — they had now become full-fledged banks offering checking / current accounts along with a wide variety of unsecured lending instruments. But they didn’t have any expertise in underwriting unsecured loans and in many cases took bad risks and failed. This in combination with some large cases of fraud (as a result of the decreased supervision) that undermined trust in S&L’s in general, led to a financial crisis in the late 1980s that thinned out the number of surviving S&L’s even further.
And in the end, those that survived the savings & loan crisis of the 1980s were no longer really savings & loans — they had become banks as we know them today.
Turn back the clocks
But what if we could bring back the real old-fashioned savings & loans from the early 1900's?
I love the principles of these original institutions and the simplicity of their business model. And I think with a little refresh powered by modern technology, there are lots of potential variations on this business model that could bring new opportunities to communities left behind by traditional banks.
One example could look something like this:
- A community/town/city could have their own online marketplace
- Through this marketplace, they could accept savings time deposits and make long-term secured loans to local residents
- If there is not enough money in the community to meet the demand for loans, they could issue to savings time deposits or CD’s to people from outside of the community who want to invest in the project
- This way, money would be flowing into communities that in the past had only seen cash flow in the other direction. (e.g. large banks taking deposits and using them to fund more lucrative loans in other cities / countries or to fuel other risky businesses)
This is just one idea but I’m sure there are lots of others out there that are variations on the original Savings & Loan concept.
Anyone of these could turn out to be a great FinTech niche that hopefully bring some George Bailey’s back into finance — and turn the tables on Mr. Potter for a change.
And wouldn’t that be something wonderful?
Note: there is a great write-up here if you are looking for more detail on the history of the US Savings and Loan Industry:
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