Deposit Demand, "Hot Money," and the Viability of Thrift Institutions.

This article explores the viability of thrift institutions in the U.S. Recent trends in financial markets have stirred fears about the ability of thrift institutions in the United States -- savings and loan associations and mutual savings banks -- to survive and prosper. Although these institutions constituted the fastest growing segment of the financial system from 1947 to the mid-1960s, their spectacular prosperity has dimmed since then as markets have become increasingly volatile. More and more they have experienced deposit drains, and no relief seems in sight. Accordingly, many knowledgeable observers question the prospects of these institutions as now constituted and regulated. Virtually every plan for general reform of the financial system implicitly or explicitiy assumes some alteration in the powers of the thrift institutions if tiiey are not to sufFer serious deterioration. In the summer of 1973 and again in the summer of 1974 trends in market interest rates gave rise to great concern over the survival of these institutions. High interest rates on Treasury securities and tiie introduction of variable rate notes by bank holding companies punctuated an already bleak outlook for the thrift institutions. Deposits fiowed out of mutual savings banks at a rapid pace and savings and loan associations had months of net withdrawals -- a rarity for the industry. Never happy with any competition, thrift institutions were especially vehement in opposing high-yielding Treasury securities and variable rate notes, whuih they felt might generate pressure that their industry could not withstand.