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December

performance differentials are attributable to differences in involvement
in consumer rather than commercial
lending. The data indicate that S&L
commercial lenders are more heavily
involved in consumer lending than
their peers, and more heavily involved
in consumer than commercial lending by a considerable margin. These
numbers suggest that commercial
lending has had a relatively minor
impact on the performance of Ohio's
thrifts to date.
• Summary and Conclusions
The data indicate that while the level
of Ohio S&L involvement in commercial lending has been growing, commercialloans continue to account for
a relatively small proportion of the
loan portfolios and operating income
at most institutions. Most of the loan
volume is concentrated at the largest
S&Ls, but size does not seem to be a
necessary prerequisite for this type of
activity.
In general, examination of the measures of profitability and risk suggests
that commercial lending is generally
not associated with superior S&L performance. However, given the typically
limited level of S&L involvement in
this activity, commercial lending is

probably not reponsible for the relatively poor performance exhibited by
thrifts making such loans. Alternatively, the evidence suggests that
thrifts need not engage in the entire
range of permissible activities to
survive.
Finally, if an increase in the number
of competitors does lead to downward pressure on prices as predicted by
economic theory, the analysis of the
geographic location of the offices of
thrift commercial lenders suggests
that S&Ls have had a beneficial impact
on competition for commercial loans
in a large number of local markets in
Ohio. Further research is necessary to
determine if this has actually occurred.

•

1, 1988

eCONOMIC
COMMeNTORY

Footnotes

1. The number of S&ls making cornrnercialloans and the total volume of commercial credit extended by S&ls in Ohio
are understated somewhat. Four large
S&ls headquartered in other states operate
offices in Ohio. These institutions make
substantial amounts of commercial loans,
but their Ohio totals are not available.

Federal Reserve Bank of Cleveland

The S&ls' share of commercial credit extended in the state is probably greater than
the percentage reported in the text. One
reason is that the S&L total excludes loan
volume of four S&L~
with home offices
outside the state. The other reason is that
the commercial bank total includes loans
made to borrowers located outside Ohio.
2.

Commercial Lending of
Ohio's S&Ls
by Gary Whalen

3. Equity calculated according to generally
accepted accounting principles (GAAP).

-

Rior to 1980, the asset and liability
powers of thrifts were limited relative
to commercial banks. In particular,
savings and loans (S&Ls) could not
generally make consumer or commercial loans or offer transactions
accounts. Because S&Ls were statutorily precluded from providing these
important components of the
product- service cluster offered by
commercial banks, they were not
viewed as full, effective bank competitors either by regulators or by the
courts when evaluating the antitrust
implications of bank mergers.

Gary Whalen is an economic advisor at
the Federal Reserve Bank of Cleveland
The views stated herein are those of the
author and not necessarily those of the
Federal Reserve Bank of Cleveland or of
the Board of Governors of the Federal
Reserve System.

This situation was fundamentally

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387

changed by passage of two pieces of
legislation in the early 1980s. The
Depository Institutions Deregulation
and Monetary Control Act of 1980 permitted S&Ls to make various types of
consumer loans and to provide consumer transactions accounts, thus allowing S&Lsto compete head-to- head with
banks for virtually the entire range of
household business. However, the
ability of S&Ls to serve commercial
customers remained limited.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Cleveland, OR 44101

The Garn-St Germain Act of 1982 further expanded S&Ls' asset and liability
powers, particularly in the commercial area. Although permissible maximums were specified for various
loan categories in the Act, S&Ls were

Material may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editor.
Address Correction Requested:
Please send corrected mailing label to the Federal Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OH 44101
ISSN 0428·1276

authorized to make any type of cornmercialloan (including unsecured
ones) and to offer demand-deposit
services to their commercial customers. Thus, the Act allowed S&Ls to
enter a product market that, due to
regulation, had largely been the private
preserve of commercial banks. At least
in terms of authorized powers, banks
and S&Ls became competitive equals.
Entry into nontraditional activities
like commercial lending could either
strengthen or weaken thrifts. For
example, engaging in such activities
might permit an S&L to add assets to
its balance sheet that have shorter
maturities than the traditional fixedrate mortgage loan, and so reduce its
exposure to rising interest rates.
Benefits from increased diversification could be realized. Returns earned
in new activities might be higher than
those obtainable in traditional mortgage lending. Thus, S&Ls engaging in
this activity could become more profitable and/or less risky.
On the other hand, start-up costs
could be high and inexperience could
result in unintentional, excessive risktaking and subsequent losses. S&Ls'
entry and aggressive competition for
incremental business could cause
lending margins to shrink or vanish.

-

Two new laws in the early 1980s
fundamentally changed the relationship between thrifts and commercial
banks, allowing S&Ls to compete for
the full range of household and
commercial business. An examination of Ohio S&Ls shows the impact
of the expanded commercial lending
powers on their performance.

Further, these additional powers were
authorized at a time when S&Ls' earnings were generally weak or nonexistent and their capital levels were
low and eroding. Thus, even a few
lending decisions that proved to be
wrong could be fatal.
Similarly, S&Ls' entry into commercial
lending could generate public benefits and costs. Attempts by S&Ls to
obtain this type of business should
theoretically intensify competition,
lowering rates and increasing the
supply of commercial loan funds in
local markets where they operate.
However, the existence of flat-rate
deposit insurance creates incentives
for S&L management to consciously

TABLE 1

SUMMARY DATA FOR S&L COMMERCIAL LENDERS IN 1987
BY SIZE CLASS
Participation
Rate'

Total
Loan Volume
(SMillions)

Above $1 bill.
(N = 12)

85.7

$262.1

$250 - $999 mill.
(N = 21)

75.9

$147.5

2.42

2.63

$100 - 249 mill
(N = 28)

61.7

$88.]

2.74

3.83

$50 - $99 mill
(N = 13)

29.5

$22.3

304

2.55

$25 - $49 mill
(N = ]4)

26.9

$9.3

2.02

2.92

Below $25 mill.
(N = 8)

21.6

$3.5

2.73

3.48

Size Class

Commercial Loans/
Total Loans
S.D.'
Mean'
1.6]
1.84

"Values are percentages. S.D. is an abbreviation fur standard deviation.
SOURCE: Federal Home Loan Bank Board financial reports and the author.

engage in high-risk, high-expectedreturn activities. Under the present
deposit insurance system, the risk of
such activities can be effectively transferred to the Federal Savings and
Loan Insurance Corporation.
In this Economic Commentary, the
extent to which S&L5 in Ohio have
chosen to exercise their expanded
commercial lending powers will be
examined. The impacts of this decision on their performance will be
investigated.
• Characteristics of Ohio's Thrift
Commercial Lenders
The data in table] indicate that not
all Ohio S&L5 have plunged headlong
into commercial lending. At the end
of ]987, 96 Ohio S&L5were making
some type of commercial loan. This
number represents roughly 43 percent of the S&L5 operating in the
state. The participation rate is up from
31 percent in 1984. Eighty-two thrifts
had secured commercial loans on
their books at year-end; 59 had unsecured commercial loans. Forty-five
were doing both types of lending.
The total volume of commercial loans
reported by S&L5 headquartered in
Ohio was roughly $533 million at
year-end 1987.1 This is approximately
double the ]984 total of $276 million.

These figures translate into a compound annual growth rate of 24.5
percent over this period. Over the
same interval, domestic commercial
and industrial loans on the books of
Ohio's commercial banks increased
to $] 7.0 billion from $11.3 billion (a
compound annual growth rate of 14.4
percent). These numbers imply a
slight increase in the S&L share of
total commercial lending, from 2.4 percent in 1984 to 3.0 percent in ]987.2
Not unexpectedly, the probability that
an S&L is involved in commercial
lending generally increases with institution size (see table 1). The percentage of institutions making commercial loans increases from roughly 22
percent of the smallest-size group
(those with total assets below $25
million) to 86 percent of those with
total assets of $1 billion or more.
The largest thrifts account for the
bulk of the total vol ume of outstanding commercial loans. Loan volume at
the 12 S&L5 in the largest-size class
represents nearly half of the total for
all Ohio thrifts. An additional 28 percent of the total outstanding amount
is on the books of the 21 commercial
lenders in the next-largest size class.

A comparison of 1987 commercial
lending totals at individual S&L5with
year-earlier figures shows that volume
increased at 57 institutions. Fifteen of
these had no commercial loans at all
on their books at the end of 1986. At
52 thrifts, the increases outpaced
growth in other types of loans, resulting in a rise in the ratio of commercial loans to total loans. Conversely,
volume declined at 42 S&L5. Given
the typically small volume of commercial loans outstanding at Ohio S&L5,
the changes in loan totals over the
1986 to 1987 interval translate into
relatively large percentage changes at
individual thrifts. At 48 institutions
the year-to-year percentage change
exceeded 25 percent.
However, when commercial loan and
total loan volumes are compared at
each thrift, the data indicate that the
scale of S&L involvement in commercial lending remains quite modest.
The commercial-loan total-loan ratio
at more than one third of the S&L5
making commercial loans was below
one percent
in 1987. At roughly
another third, this ratio is in the 1 to 4
percent range. Only 21 have ratio
values above 4 percent. These values
are considerably lower than those of
the typical commercial bank.
Interestingly, the data in the second
to last column in table] reveal that
the mean commercial-loan total-loan
ratio for S&L commercial lenders
does not vary greatly across size
classes. In combination with the relatively large standard deviations
reported in the last column of table 1,
this finding implies considerable variation in the extent of involvement in
commercial lending, even within a
given size class. Additionally, it suggests that small size does not preclude
an S&L from engaging in this activity.
Although the number of S&L5 engaging in commercial lending is not particularly large and the extent of involvement is typically not great, analysis of
the geographic location of their offices
suggests that these institutions have
some impact on competition for commercial loans in a large proportion of
local markets throughout the state.

TABLE 2

SELECTED FINANCIAL RATIOS' FOR S&L COMMERCIAL LENDERS
AND NONLENDERS"
CLIR87

ROA87

Total Assets
of$]OO Million
or More

Size Class

1.88

0.01
(0.61)

-0.27
(0.33)

3.39
(5.42)

.57
(.40)

5.92
(3.19)

Total Assets
Less Than
$100 Million

1.56

0.79
(0.81)

0.Q7
(0.44 )

6.02
(8.00)

.64
(.46)

7.74
(2.63)

Ratio Definitions:
CLIR87: Commercial

Loan Income/Total

ROA87 : Net Income After Taxes/Total

CHROA74 EQASR87 SDROA74

Operating

CRLR87

Income, year-end, 1987.

Assets, year-end, 1987.

CHROA74: ROA87 minus same ratio calculated at year-end, 1984.
EQASR87: Equity(GMP

basis)/Total

Assets, year-end, ]987.

SDROA74: The standard deviation of the ratio of net income after taxes to total
assets over the ]984 to ]987 interval
CLIR87: Consumer

Loans/Total Loans, year-end, ]987.

'Values in the table are sample means.
··Mean values for nonlenders appear in parentheses.
SOURCE: Federal Home Loan Bank Board financial reports and the author.

Seventy-three percent of the thrifts
making commercial loans are headquartered in metropolitan statistical
area (MSA) counties where numerous
bank competitors exist. Still, thrift
commercial lenders increase the
number of suppliers of commercial
credit by 10 or more in five Ohio
MSAs. In another four, the increase is
at least five, but less than ] O. Further,
since S&L5can branch statewide in
Ohio, the office of a thrift commercial
lender is located in 92 percent (46 of
50) of the rural counties in the state,
where the number of banks competing for commercial loan customers is
typically small Two or more S&L
commercial lenders are operating in
25 rural counties.
• An Analysis of Performance
Differences: Commercial Lenders
vs. NonLenders
The mean values of several ratios
reflecting various dimensions of performance for S&L commercial lenders
and nonlenders appear in table 2. To
ease the exposition, the six size
classes used in table 1 are collapsed
into two-S&L5 larger than $100 million in total assets and S&L5 smaller
than $100 million. The numbers in
parentheses below various entries in

the table are the corresponding value
for S&L5 in that size class that had no
commercial loans on their books at
year-end 1987.
Before proceeding with a discussion
of the data in the' table, several
caveats should be noted. Determining
whether or not any observed differences in the financial ratios between
lenders and nonlenders are due to
commercial lending activity is difficult for a number of reasons. While
the gross income earned on commercial loans is reported by S&L5, loan
charge-offs and loan-loss provisions
are not. In addition, both the income
and expense attributable to current
lending activity may impact the
income statement and balance sheet
with a lag.
Further, a finding that involvement in
commercial lending is associated
with inferior performance does not
necessarily indicate causation running
from the former to the latter. It is
possible that poor performance due
to some other factor (such as interest
rate mismatch) could induce an S&L
to engage in commercial lending or
other types of nontraditional activities
with high expected returns.

The statistics in the first column of
table 2 suggest that the typical S&L
does not derive a large portion of its
income from commercial lending.
The mean value of the ratio of
income earned on commercial loans'
to total operating income is below
two percent for both size groups.
The data in the next column of table 2
are the mean values of the 1987 rate
of return on assets, a measure ofS&L5'
overall profitability in that year. A
comparison of each figure with the
counterpart ratio (in parentheses below
it) for S&L5 of similar size that did not
make commercial loans reveals considerable 1987 profitability differences
between large S&L5 making commercial loans and those that did not, but
virtually no difference for smaller institutions. Specifically, the profitability
of large S&L commercial lenders is
well below that of nonlenders.
A similar pattern is evident if one
looks at the change in profitability
over the 1984 to 1987 period. The
mean change in profitability of S&L5
that were not involved in commercial
lending exceeds that of commercial
lenders in both size classes. Overall,
roughly 75 percent of the S&L5that did
not make commercial loans improved
their profitability over this interval
Only about two-thirds of the commercial lenders accomplished this feat.
The next two columns in the table
contain mean values for two different
measures of S&L risk-the
ratio of
equity (GMP basis) to assets and the
standard deviation of return on assets
over the 1984 to 1987 time period.' In
general, higher risk is indicated by
lower equity ratios and larger profit
variability. The statistics suggest that
S&L5 involved in commercial lending
are riskier than their peers that
choose not to engage in this activity.
The last column of table 2 contains
mean values of the ratio of consumer
loans to total loans. This ratio is
included to provide additional perspective on the relative importance of
commercial lending to Ohio thrifts
and so perhaps to allow one to determine whether or not the observed

TABLE 1

SUMMARY DATA FOR S&L COMMERCIAL LENDERS IN 1987
BY SIZE CLASS
Participation
Rate'

Total
Loan Volume
(SMillions)

Above $1 bill.
(N = 12)

85.7

$262.1

$250 - $999 mill.
(N = 21)

75.9

$147.5

2.42

2.63

$100 - 249 mill
(N = 28)

61.7

$88.]

2.74

3.83

$50 - $99 mill
(N = 13)

29.5

$22.3

304

2.55

$25 - $49 mill
(N = ]4)

26.9

$9.3

2.02

2.92

Below $25 mill.
(N = 8)

21.6

$3.5

2.73

3.48

Size Class

Commercial Loans/
Total Loans
S.D.'
Mean'
1.6]
1.84

"Values are percentages. S.D. is an abbreviation fur standard deviation.
SOURCE: Federal Home Loan Bank Board financial reports and the author.

engage in high-risk, high-expectedreturn activities. Under the present
deposit insurance system, the risk of
such activities can be effectively transferred to the Federal Savings and
Loan Insurance Corporation.
In this Economic Commentary, the
extent to which S&L5 in Ohio have
chosen to exercise their expanded
commercial lending powers will be
examined. The impacts of this decision on their performance will be
investigated.
• Characteristics of Ohio's Thrift
Commercial Lenders
The data in table] indicate that not
all Ohio S&L5 have plunged headlong
into commercial lending. At the end
of ]987, 96 Ohio S&L5were making
some type of commercial loan. This
number represents roughly 43 percent of the S&L5 operating in the
state. The participation rate is up from
31 percent in 1984. Eighty-two thrifts
had secured commercial loans on
their books at year-end; 59 had unsecured commercial loans. Forty-five
were doing both types of lending.
The total volume of commercial loans
reported by S&L5 headquartered in
Ohio was roughly $533 million at
year-end 1987.1 This is approximately
double the ]984 total of $276 million.

These figures translate into a compound annual growth rate of 24.5
percent over this period. Over the
same interval, domestic commercial
and industrial loans on the books of
Ohio's commercial banks increased
to $] 7.0 billion from $11.3 billion (a
compound annual growth rate of 14.4
percent). These numbers imply a
slight increase in the S&L share of
total commercial lending, from 2.4 percent in 1984 to 3.0 percent in ]987.2
Not unexpectedly, the probability that
an S&L is involved in commercial
lending generally increases with institution size (see table 1). The percentage of institutions making commercial loans increases from roughly 22
percent of the smallest-size group
(those with total assets below $25
million) to 86 percent of those with
total assets of $1 billion or more.
The largest thrifts account for the
bulk of the total vol ume of outstanding commercial loans. Loan volume at
the 12 S&L5 in the largest-size class
represents nearly half of the total for
all Ohio thrifts. An additional 28 percent of the total outstanding amount
is on the books of the 21 commercial
lenders in the next-largest size class.

A comparison of 1987 commercial
lending totals at individual S&L5with
year-earlier figures shows that volume
increased at 57 institutions. Fifteen of
these had no commercial loans at all
on their books at the end of 1986. At
52 thrifts, the increases outpaced
growth in other types of loans, resulting in a rise in the ratio of commercial loans to total loans. Conversely,
volume declined at 42 S&L5. Given
the typically small volume of commercial loans outstanding at Ohio S&L5,
the changes in loan totals over the
1986 to 1987 interval translate into
relatively large percentage changes at
individual thrifts. At 48 institutions
the year-to-year percentage change
exceeded 25 percent.
However, when commercial loan and
total loan volumes are compared at
each thrift, the data indicate that the
scale of S&L involvement in commercial lending remains quite modest.
The commercial-loan total-loan ratio
at more than one third of the S&L5
making commercial loans was below
one percent
in 1987. At roughly
another third, this ratio is in the 1 to 4
percent range. Only 21 have ratio
values above 4 percent. These values
are considerably lower than those of
the typical commercial bank.
Interestingly, the data in the second
to last column in table] reveal that
the mean commercial-loan total-loan
ratio for S&L commercial lenders
does not vary greatly across size
classes. In combination with the relatively large standard deviations
reported in the last column of table 1,
this finding implies considerable variation in the extent of involvement in
commercial lending, even within a
given size class. Additionally, it suggests that small size does not preclude
an S&L from engaging in this activity.
Although the number of S&L5 engaging in commercial lending is not particularly large and the extent of involvement is typically not great, analysis of
the geographic location of their offices
suggests that these institutions have
some impact on competition for commercial loans in a large proportion of
local markets throughout the state.

TABLE 2

SELECTED FINANCIAL RATIOS' FOR S&L COMMERCIAL LENDERS
AND NONLENDERS"
CLIR87

ROA87

Total Assets
of$]OO Million
or More

Size Class

1.88

0.01
(0.61)

-0.27
(0.33)

3.39
(5.42)

.57
(.40)

5.92
(3.19)

Total Assets
Less Than
$100 Million

1.56

0.79
(0.81)

0.Q7
(0.44 )

6.02
(8.00)

.64
(.46)

7.74
(2.63)

Ratio Definitions:
CLIR87: Commercial

Loan Income/Total

ROA87 : Net Income After Taxes/Total

CHROA74 EQASR87 SDROA74

Operating

CRLR87

Income, year-end, 1987.

Assets, year-end, 1987.

CHROA74: ROA87 minus same ratio calculated at year-end, 1984.
EQASR87: Equity(GMP

basis)/Total

Assets, year-end, ]987.

SDROA74: The standard deviation of the ratio of net income after taxes to total
assets over the ]984 to ]987 interval
CLIR87: Consumer

Loans/Total Loans, year-end, ]987.

'Values in the table are sample means.
··Mean values for nonlenders appear in parentheses.
SOURCE: Federal Home Loan Bank Board financial reports and the author.

Seventy-three percent of the thrifts
making commercial loans are headquartered in metropolitan statistical
area (MSA) counties where numerous
bank competitors exist. Still, thrift
commercial lenders increase the
number of suppliers of commercial
credit by 10 or more in five Ohio
MSAs. In another four, the increase is
at least five, but less than ] O. Further,
since S&L5can branch statewide in
Ohio, the office of a thrift commercial
lender is located in 92 percent (46 of
50) of the rural counties in the state,
where the number of banks competing for commercial loan customers is
typically small Two or more S&L
commercial lenders are operating in
25 rural counties.
• An Analysis of Performance
Differences: Commercial Lenders
vs. NonLenders
The mean values of several ratios
reflecting various dimensions of performance for S&L commercial lenders
and nonlenders appear in table 2. To
ease the exposition, the six size
classes used in table 1 are collapsed
into two-S&L5 larger than $100 million in total assets and S&L5 smaller
than $100 million. The numbers in
parentheses below various entries in

the table are the corresponding value
for S&L5 in that size class that had no
commercial loans on their books at
year-end 1987.
Before proceeding with a discussion
of the data in the' table, several
caveats should be noted. Determining
whether or not any observed differences in the financial ratios between
lenders and nonlenders are due to
commercial lending activity is difficult for a number of reasons. While
the gross income earned on commercial loans is reported by S&L5, loan
charge-offs and loan-loss provisions
are not. In addition, both the income
and expense attributable to current
lending activity may impact the
income statement and balance sheet
with a lag.
Further, a finding that involvement in
commercial lending is associated
with inferior performance does not
necessarily indicate causation running
from the former to the latter. It is
possible that poor performance due
to some other factor (such as interest
rate mismatch) could induce an S&L
to engage in commercial lending or
other types of nontraditional activities
with high expected returns.

The statistics in the first column of
table 2 suggest that the typical S&L
does not derive a large portion of its
income from commercial lending.
The mean value of the ratio of
income earned on commercial loans'
to total operating income is below
two percent for both size groups.
The data in the next column of table 2
are the mean values of the 1987 rate
of return on assets, a measure ofS&L5'
overall profitability in that year. A
comparison of each figure with the
counterpart ratio (in parentheses below
it) for S&L5 of similar size that did not
make commercial loans reveals considerable 1987 profitability differences
between large S&L5 making commercial loans and those that did not, but
virtually no difference for smaller institutions. Specifically, the profitability
of large S&L commercial lenders is
well below that of nonlenders.
A similar pattern is evident if one
looks at the change in profitability
over the 1984 to 1987 period. The
mean change in profitability of S&L5
that were not involved in commercial
lending exceeds that of commercial
lenders in both size classes. Overall,
roughly 75 percent of the S&L5that did
not make commercial loans improved
their profitability over this interval
Only about two-thirds of the commercial lenders accomplished this feat.
The next two columns in the table
contain mean values for two different
measures of S&L risk-the
ratio of
equity (GMP basis) to assets and the
standard deviation of return on assets
over the 1984 to 1987 time period.' In
general, higher risk is indicated by
lower equity ratios and larger profit
variability. The statistics suggest that
S&L5 involved in commercial lending
are riskier than their peers that
choose not to engage in this activity.
The last column of table 2 contains
mean values of the ratio of consumer
loans to total loans. This ratio is
included to provide additional perspective on the relative importance of
commercial lending to Ohio thrifts
and so perhaps to allow one to determine whether or not the observed

December

performance differentials are attributable to differences in involvement
in consumer rather than commercial
lending. The data indicate that S&L
commercial lenders are more heavily
involved in consumer lending than
their peers, and more heavily involved
in consumer than commercial lending by a considerable margin. These
numbers suggest that commercial
lending has had a relatively minor
impact on the performance of Ohio's
thrifts to date.
• Summary and Conclusions
The data indicate that while the level
of Ohio S&L involvement in commercial lending has been growing, commercialloans continue to account for
a relatively small proportion of the
loan portfolios and operating income
at most institutions. Most of the loan
volume is concentrated at the largest
S&Ls, but size does not seem to be a
necessary prerequisite for this type of
activity.
In general, examination of the measures of profitability and risk suggests
that commercial lending is generally
not associated with superior S&L performance. However, given the typically
limited level of S&L involvement in
this activity, commercial lending is

probably not reponsible for the relatively poor performance exhibited by
thrifts making such loans. Alternatively, the evidence suggests that
thrifts need not engage in the entire
range of permissible activities to
survive.
Finally, if an increase in the number
of competitors does lead to downward pressure on prices as predicted by
economic theory, the analysis of the
geographic location of the offices of
thrift commercial lenders suggests
that S&Ls have had a beneficial impact
on competition for commercial loans
in a large number of local markets in
Ohio. Further research is necessary to
determine if this has actually occurred.

•

1, 1988

eCONOMIC
COMMeNTORY

Footnotes

1. The number of S&ls making cornrnercialloans and the total volume of commercial credit extended by S&ls in Ohio
are understated somewhat. Four large
S&ls headquartered in other states operate
offices in Ohio. These institutions make
substantial amounts of commercial loans,
but their Ohio totals are not available.

Federal Reserve Bank of Cleveland

The S&ls' share of commercial credit extended in the state is probably greater than
the percentage reported in the text. One
reason is that the S&L total excludes loan
volume of four S&L~
with home offices
outside the state. The other reason is that
the commercial bank total includes loans
made to borrowers located outside Ohio.
2.

Commercial Lending of
Ohio's S&Ls
by Gary Whalen

3. Equity calculated according to generally
accepted accounting principles (GAAP).

-

Rior to 1980, the asset and liability
powers of thrifts were limited relative
to commercial banks. In particular,
savings and loans (S&Ls) could not
generally make consumer or commercial loans or offer transactions
accounts. Because S&Ls were statutorily precluded from providing these
important components of the
product- service cluster offered by
commercial banks, they were not
viewed as full, effective bank competitors either by regulators or by the
courts when evaluating the antitrust
implications of bank mergers.

Gary Whalen is an economic advisor at
the Federal Reserve Bank of Cleveland
The views stated herein are those of the
author and not necessarily those of the
Federal Reserve Bank of Cleveland or of
the Board of Governors of the Federal
Reserve System.

This situation was fundamentally

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387

changed by passage of two pieces of
legislation in the early 1980s. The
Depository Institutions Deregulation
and Monetary Control Act of 1980 permitted S&Ls to make various types of
consumer loans and to provide consumer transactions accounts, thus allowing S&Lsto compete head-to- head with
banks for virtually the entire range of
household business. However, the
ability of S&Ls to serve commercial
customers remained limited.

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The Garn-St Germain Act of 1982 further expanded S&Ls' asset and liability
powers, particularly in the commercial area. Although permissible maximums were specified for various
loan categories in the Act, S&Ls were

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authorized to make any type of cornmercialloan (including unsecured
ones) and to offer demand-deposit
services to their commercial customers. Thus, the Act allowed S&Ls to
enter a product market that, due to
regulation, had largely been the private
preserve of commercial banks. At least
in terms of authorized powers, banks
and S&Ls became competitive equals.
Entry into nontraditional activities
like commercial lending could either
strengthen or weaken thrifts. For
example, engaging in such activities
might permit an S&L to add assets to
its balance sheet that have shorter
maturities than the traditional fixedrate mortgage loan, and so reduce its
exposure to rising interest rates.
Benefits from increased diversification could be realized. Returns earned
in new activities might be higher than
those obtainable in traditional mortgage lending. Thus, S&Ls engaging in
this activity could become more profitable and/or less risky.
On the other hand, start-up costs
could be high and inexperience could
result in unintentional, excessive risktaking and subsequent losses. S&Ls'
entry and aggressive competition for
incremental business could cause
lending margins to shrink or vanish.

-

Two new laws in the early 1980s
fundamentally changed the relationship between thrifts and commercial
banks, allowing S&Ls to compete for
the full range of household and
commercial business. An examination of Ohio S&Ls shows the impact
of the expanded commercial lending
powers on their performance.

Further, these additional powers were
authorized at a time when S&Ls' earnings were generally weak or nonexistent and their capital levels were
low and eroding. Thus, even a few
lending decisions that proved to be
wrong could be fatal.
Similarly, S&Ls' entry into commercial
lending could generate public benefits and costs. Attempts by S&Ls to
obtain this type of business should
theoretically intensify competition,
lowering rates and increasing the
supply of commercial loan funds in
local markets where they operate.
However, the existence of flat-rate
deposit insurance creates incentives
for S&L management to consciously