savings bank

Financial institution that gathers savings and pays interest or dividends to savers. It channels the savings of individuals who wish to consume less than their incomes to borrowers who wish to spend more. This function is performed by mutual savings banks, savings and loan associations, credit unions, postal savings systems, and municipal savings banks. Unlike a commercial bank, a savings bank does not accept demand deposits. Many savings banks originated as part of a philanthropic effort to encourage saving among people of modest means. The earliest municipal savings banks developed from the municipal pawnshops of Italy (see pawnbroking). Other early savings banks were founded in Germany in 1778 and The Netherlands in 1817. The first U.S. savings banks were nonprofit institutions established in the early 1800s for charitable purposes.

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Financial institution that accepts savings from depositors and uses those funds primarily to make loans to home buyers. Savings and loan associations (S&Ls) originated with 18th-century British building societies, in which workmen banded together to finance the building of their homes. The first U.S. savings and loan was established in Philadelphia in 1831. S&Ls were initially cooperative institutions in which savers were shareholders in the association and received dividends in proportion to profits, but today are mutual organizations that offer a variety of savings plans. They are not obliged to rely on individual deposits for funds but are permitted to borrow from other financial institutions and to market mortgage-backed securities, money-market certificates, and stock. Because high inflation and rising interest rates in the 1970s made fixed-rate mortgages unprofitable, regulations were altered to permit S&Ls to renegotiate mortgages. In the late 1980s, a growing number of S&Ls failed because inadequate regulation had allowed risky investments and fraud to flourish. The government was obliged to cover vast losses in excess of $200 billion, and the Federal Savings and Loan Insurance Corp. (FSLIC) became insolvent in 1989. Its insurance functions were taken over by a new organization supervised by the Federal Deposit Insurance Corp., and the Resolution Trust Corp. was established to handle the bailout of the failed S&Ls.

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