Bank Charters vs. Thrift Charters


Simon Kwan

FRBSF Economic Letter 1998-13 | April 24, 1998

One of the key issues in Congress’s current debates about modernizing the financial services industry is whether to eliminate the charter for thrifts (savings and loans). The savings and loan associations originally were created with a special mandate to channel funds to the housing industry.

Western Banking Quarterly is a review of banking developments in the Twelfth Federal Reserve District, and includes FRBSF’s Regional Banking Tables. It is published in the Economic Letter on the fourth Friday of January, April, July, and October.

One of the key issues in Congress’s current debates about modernizing the financial services industry is whether to eliminate the charter for thrifts (savings and loans). The savings and loan associations originally were created with a special mandate to channel funds to the housing industry. But over the years, the charter has changed and so has mortgage financing, raising the question of whether a “special” charter is needed. For example, the thrift charter was greatly liberalized during the savings and loan debacle in the 1980s in an attempt to rescue the industry; and with the advances in the mortgage market and the prevalence of other financial institutions that engage in mortgage financing, the role of thrifts in house financing has faded.

With liberalized charters, thrifts today still emphasize mortgage lending, but they also offer their customers an array of financial products similar to those of commercial banks. Indeed, in some respects, thrift charters are more liberal than bank charters. For example, while the Glass-Steagall Act separates commercial banking from investment banking and the Bank Holding Company Act separates banking from commerce, certain thrift holding companies have relatively unfettered financial and commercial powers. These and other differences in the charters give financial services providers the opportunity to engage in structural and regulatory arbitrage, choosing the charter that is most advantageous to their operation. In this Economic Letter, I discuss the major differences between bank and thrift charters and recent developments that may affect their future.

Comparing the two charters

Today, both banks and thrifts can offer virtually the same bundle of financial services products, from transactions, savings, and time deposits to consumer, real estate, and commercial loans. But they differ noticeably in their commercial lending capacity. Unlike banks, thrifts face a statutory lending limit for commercial loans of less than 20 percent of assets, of which half may only be used for small business loans. In addition, to be eligible to obtain advances from a Federal Home Loan Bank, a thrift must meet the qualified thrift lender test. This test restricts a thrift’s commercial lending by requiring that 65 percent of its portfolio assets be in mortgage and consumer-related assets. The commercial lending limit does not appear to be much of a constraint for thrifts: as of 1997, the aggregate commercial and industrial loans made by thrifts represented only 1.5 percent of their assets, compared to 14.8 percent of commercial bank assets that are in commercial loans.

Banks and thrifts also differ in terms of their authority to affiliate with other nondepository entities through a holding company structure. Banking firms are governed both by Glass-Steagall, which separates commercial banking from investment banking, and by the Bank Holding Company Act. Although recently, commercial banking organizations have made inroads into investment banking via their so-called “Section 20 subsidiaries,” these Fed authorized securities subsidiaries can only engage in a limited amount of bank-ineligible securities activities (see Kwan 1997). Specifically, revenues from bank-ineligible securities activities at the Section 20 subsidiaries are limited to 25 percent of total revenues. Regarding other nonbank activities, the Bank Holding Company Act states that bank holding companies’ non-bank subsidiaries can engage only in activities that are closely related to the business of banking. This prevents banking firms from underwriting most insurance products, although insurance agency activities have been authorized for direct operating subsidiaries of banks subject to geographic restriction. Thrift holding companies that control more than one thrift face restrictions similar to those for bank holding companies.

Unitary thrift holding companies, that is holding companies controlling only one thrift subsidiary, have far broader affiliation rights. They are free to engage directly or indirectly in any legitimate business activities, provided the activity does not pose a safety and soundness risk to their thrift subsidiary. There are currently 102 unitary thrift holding companies that actively engage in nonbanking activities, including securities underwriting and dealing, real estate development, insurance sales and underwriting, automobile sales, fast food, and dairy farming. Their thrift subsidiaries hold approximately $196 billion in assets, representing about 26 percent of the industry total.

In addition to broader affiliation rights, the thrift charter also provides greater flexibility to firms seeking to offer financial services nationwide. Federally chartered thrifts have long been allowed to establish branches nationwide. Before the enactment of the Riegel-Neal Interstate Banking and Branching Efficiency Act, banks were prohibited from branching across state lines. And banks still cannot branch into Texas and Montana, states that opted out of the federal interstate branching law. But a federally chartered thrift can operate branch offices nationwide without geographic restrictions. Furthermore, federal pre-emption of state laws allows federal thrifts to operate under one set of federal rules, rather than also complying with different state statutes, which can greatly enhance their efficiencies in providing financial services across the country.

Reflecting the greater flexibility in affiliation that comes with the thrift charter, a number of nonbank financial institutions and commercial firms recently either have obtained or have applied for a thrift charter. They include Merrill Lynch, General Electric Company, Morgan Stanley-Dean Witter-Discover, A.G. Edwards, Travelers Group, Transamerica, State Farm Mutual Automobile Insurance Company, Allstate Corporation, and PaineWebber Group Inc. For firms that already have a nationwide network of offices, the thrift charter allows them to offer banking products through their existing distribution channel, providing consumers access to a wider array of financial products. This is particularly appealing to securities firms and insurance companies that are prohibited from owning commercial banks.

Proposed legislation

It is not surprising that the Congress currently is debating the future of the thrift charter. Clearly, while both banks and thrifts are selling the same financial services products, they have very different powers and are regulated somewhat differently. Furthermore, it is unclear whether the thrift charter is still needed in today’s environment to provide financing for housing (see Laderman and Passmore, forthcoming). Finally, the thrift charter gives financial services providers the opportunity to engage in structural and regulatory arbitrage.

While the latest financial modernization proposal would not eliminate the thrift charter outright, it calls for somewhat more parity between the two charters. While grandfathering most existing arrangements, going forward, the proposed Financial Services Competition Act would eliminate the unitary thrift loophole by limiting new thrift holding companies to activities that are permissible for bank holding companies, and it would close the branching gap between banks and thrifts by allowing federal thrifts to open new interstate branches only to the extent permissible for national banks. The proposed legislation also would merge the thrift and bank regulators, as well as the two deposit insurance funds.


The thrift charter was originally intended to promote home ownership by channelling funds to the housing industry. Over time, it has evolved into a very flexible vehicle for providing a broad array of financial services products by firms that are not allowed to operate commercial banks. While thrifts are allowed to engage in virtually the same activities as banks, they can more freely affiliate with securities firms and insurance companies than banks. Thus, the thrift charter allows financial conglomerates to complete their financial services product line-from securities brokerage to insurance to banking. As the debate about thrift charters continues, these advantages will weigh at least as heavily in the discussion as whether the thrift charter is still needed to promote residential financing.

Simon Kwan
Senior Economist


Kwan, S. 1997. “Cracking the Glass-Steagall Barriers.” FRBSF Economic Letter 97-08 (March 21).

Laderman, E., and W. Passmore. 1998. “Is Mortgage Lending by Savings Associations Special?” Federal Reserve Bank of San Francisco Economic Review, forthcoming.

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