Question

distinguish thrift operations and finance operations from each other and from traditional banks? how are they different and similar?

Answer 1

Solution =

Thrift - 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. It includes savings and loan 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.

Difference -

1) 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.

2) 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.

3) 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.

4) Charter

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.

5) Ownership

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.

6) Funding

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

Similaity -

Thrifts, along with commercial banks and credit unions, qualify as depository institutions. Most people are familiar with commercial banks and credit unions, but the line becomes fuzzy when defining a thrift. The line is fuzzy in certain states as well, but thrifts are essentially savings and loan associations. More importantly, they are savings banks that specialize in real estate.

Originally, thrifts only offered savings accounts and time deposits, but over the past 20 years, the banks' scope of services has expanded as the needs of the average consumer expanded. They now offer the same products as credit unions and commercial banks.