Thrifts Vs. Banks: What’s the Difference?

If you’ve watched “It’s a Wonderful Life,” you’ve seen a thrift institution in action — the Bailey Bros. Building & Loan Association that helped families in Bedford Falls buy homes. While thrift institutions (also called savings and loan associations or S&Ls) aren’t as common today, they still play an important role in American banking by specializing in residential mortgages and consumer savings.

While thrifts operate similarly to traditional banks in many ways, they’re governed by different regulations and serve a distinct role in the financial system. Understanding these differences can help you decide whether a community-focused thrift institution or a full-service commercial bank better meets your banking needs.

Differences between thrift banks and commercial banks

The primary distinction between thrift institutions and commercial banks lies in their regulatory requirements, business focus and operational structure. Federal law mandates that thrift institutions maintain at least 65% of their assets in housing-related loans and other qualified investments — a requirement known as the qualified thrift lender (QTL) test.

Regulatory structure: Since 2011, federal savings associations have been regulated by the Office of the Comptroller of the Currency (OCC) rather than the now-defunct Office of Thrift Supervision. This regulatory change, implemented under the Dodd-Frank Act, brought thrift supervision under the same agency that oversees national banks while maintaining distinct operational requirements.

Business model focus: Commercial banks operate as financial “department stores,” often offering services to consumers, businesses and other institutions. Thrift institutions function more like specialty shops, concentrating on residential lending and consumer deposits. This focused approach allows them to develop specialized expertise in mortgage lending.

Lending limitations: While commercial banks can dedicate significant portions of their portfolios to commercial lending, thrift institutions are limited to no more than 20% of their assets in commercial loans. This restriction ensures thrifts remain focused on their primary mission of supporting homeownership and consumer financial services.

Bankrate Insight: The regulatory advantage of thrifts

Thrift institutions’ access to the Federal Home Loan Bank System gives them a significant funding advantage. This cooperative system provides low-cost advances that thrifts can use to fund mortgages, allowing them to offer competitive rates to both borrowers and depositors.

Types of thrift banks

Thrift institutions come in several forms, each with distinct ownership structures and operational characteristics that affect how they serve customers and communities.

Federal savings associations

Federal savings associations are chartered and regulated by the OCC and can operate as either stock companies (owned by shareholders) or mutual institutions (owned by depositors). These institutions must comply with federal regulations and maintain membership in the Federal Home Loan Bank System.

Stock savings associations operate similarly to traditional banks with shareholders expecting returns on their investments. However, they must still comply with the QTL test and focus primarily on residential lending. Examples include some of the larger thrift institutions that have retained their federal savings association charters.

Mutual savings banks

Mutual savings banks represent the traditional cooperative model of thrift banking. Depositors automatically become partial owners of the institution through their deposits and accumulated retained earnings. This ownership structure gives depositors voting rights in major institutional decisions and ensures the bank operates primarily for member benefit rather than external profit.

Mutual savings banks are concentrated primarily in the northeastern United States and typically serve local communities with strong community ties. Because they have no external shareholders demanding quarterly profits, mutual banks can focus on long-term relationships and competitive savings account rates.

State-chartered thrift institutions

Some thrift institutions operate under state rather than federal charters, giving them additional operational flexibility while still maintaining their focus on residential lending. State-chartered thrifts are regulated by state banking departments but still receive FDIC insurance protection.

These institutions often serve regional markets and may offer services tailored to local community needs. State chartering can provide more flexibility in product offerings while maintaining the core thrift mission of supporting homeownership.

The impact of thrift banks

Thrift institutions have historically played a crucial role in expanding homeownership opportunities, particularly for moderate-income families and first-time homebuyers. Their specialized focus on residential lending has made them important sources of mortgage credit in many communities.

• Community development: Unlike large national banks that may focus on profitable metropolitan markets, thrift institutions often serve smaller communities, rural areas and underserved markets where access to mortgage credit might otherwise be limited. This community focus aligns with their original mission of promoting homeownership for working-class families.
• Homeownership accessibility: The specialized expertise of thrift institutions in mortgage lending often translates to more flexible underwriting approaches for borrowers who may not fit traditional lending criteria. This can include first-time homebuyers, those with non-standard income documentation, or buyers in smaller markets.
• Economic stability during downturns: Research indicates that communities with strong local financial institutions, including thrift institutions, tend to maintain more stable housing markets during economic stress. The local market knowledge and community relationships of thrift institutions can provide stability that larger, more distant institutions may not offer.

Community banking advantage

Local thrift institutions often provide more personalized service and flexible lending criteria because their decision-makers live and work in the communities they serve. This local knowledge can be particularly valuable for borrowers with unique circumstances or properties in smaller markets.

What thrifts do and don’t do

Understanding what services thrifts typically provide — and which they generally don’t — can help you determine if a thrift institution meets your banking needs.

• Core services thrifts provide: Thrift institutions offer checking and savings accounts, certificates of deposit, personal loans, auto loans, credit cards, and various types of mortgages. Many also provide online and mobile banking services comparable to those offered by traditional banks.
• The savings rate advantage: One of the most significant benefits of banking with a thrift institution is typically higher interest rates on deposit accounts. Their access to low-cost funding through the Federal Home Loan Bank System allows many thrifts to offer more competitive rates on savings accounts and CDs than larger commercial banks.
• Limited business services: Thrift institutions generally offer minimal commercial banking services compared to full-service banks. You won’t typically find extensive business lending or commercial real estate financing at most thrift institutions.
• Technology and convenience: While larger thrift institutions offer digital banking services, smaller community-based thrifts may have more limited technology offerings compared to major national banks. However, this can be offset by more personalized customer service and local decision-making.

History of thrifts

Thrift institutions originated from British building societies in the late 18th century, with the concept arriving in America in the early 1800s. The decades following World War II marked the golden age of thrift institutions. Government policies actively promoted homeownership, and thrifts became the primary source of residential mortgage financing. At their peak in the 1960s and 1970s, thrift institutions originated nearly half of all home mortgages in the United States.

The 1980s brought significant deregulation that allowed thrift institutions to engage in riskier lending practices. Many institutions invested in speculative commercial real estate and other ventures far removed from their traditional residential lending focus, leading to widespread failures.

Between 1986 and 1991, over 1,000 thrift institutions failed, requiring government intervention that ultimately cost taxpayers more than $120 billion. The crisis led to the closure of 747 insolvent institutions and fundamental changes in thrift regulation and supervision.

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 restructured thrift regulation and created the Office of Thrift Supervision. Later, the 2010 Dodd-Frank Act transferred supervisory authority to the OCC and FDIC, establishing the current regulatory framework.

Thrifts may be harder to find in the future

Many institutions are choosing to convert to commercial bank charters to gain operational flexibility and eliminate regulatory restrictions. This trend suggests the traditional thrift model may become increasingly rare.

The residential mortgage market has also become increasingly dominated by specialized mortgage companies and large national banks. This evolution has reduced some of the traditional competitive advantages that thrift institutions historically enjoyed in mortgage lending.

Lastly, modern banking regulation requires significant compliance investments that may disproportionately affect smaller thrift institutions. The cost of regulatory compliance can make it difficult for smaller thrifts to remain profitable while maintaining their traditional community focus.

Bottom line

Thrifts specialize in residential lending and consumer deposits, often providing higher savings rates and more personalized service than large commercial banks. However, they typically offer fewer business services and may have more limited technology capabilities.

If you prioritize competitive deposit rates, community focus and specialized mortgage expertise, a thrift institution may be an excellent choice for you. If you need business banking services, extensive digital tools or complex financial products, a full-service commercial bank might better serve your needs.

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