Some Recent Developments in the Savings and Loan Deposit Markets

Abstract

Savings and loan associations (StLs) hold most of their assets in long-term mortgages while the liability side of their balance sheets is dominated by short-term passbook accounts, which are effectively demand deposits. It is widely recogllized that this structure has caused problems for the industry, particularly during periods of tight money as in 1966 and 1969. When market interest rates rise associations must respond with deposit rate increases if they are to maintain deposit balances. But this is difficult to doS given the fact that they are locked into old mortgages which yield a low rate of return, and for which virtually no secondary market exists. Some progress has been made toward correcting this ;iasset-liability imbalance' through lengthening the maturity of liabilities. Between January 1967 and January 1969, the passbook traditionally employed by the industry were held approximately constant. Over the same period, accounts at S&Ls grew from $13.6 billion to $32 billion, or roughly 235 percent. Like certificates of deposit at commercial banks, these special deposits normally pay a higher rate and have some combination of minimum-term and minimum-balance restrictions. In January 1969, the bulk of special deposits at savings and loan associations had minimum terms of at least six months. Thirty-one percent required the commitment of funds for a year or more [5] . While this is much shorter than the eight-toten year life of a typical residential mortgage, it represents a substantial lengthening over the demand type of passbook account. As a result) studies of these special instruments have found that they have decreased deposit turnover and somewhat im-