The Federal Reserve’s announcement last week that savings and loans will have to increase their capital requirements may doom the institutions made infamous by the S&L crisis of more than 20 years ago. And that may be a bad thing for consumers, according to CNBC.com.
The S&Ls have been able to thrive largely on their ability to lend large amounts of money, primarily through mortgages, while keeping low capital levels, strategists at financial services firm Keefe, Bruyette & Woods said in a research note. While the measures will help avert meltdowns in the industry, they may also cause mortgage rates to rise.
"We believe that regulatory changes following the financial crisis, including the announcement of thrift capital requirement last week, have ended the viability of the thrift industry," strategists at financial services firm Keefe, Bruyette & Woods said in a research note.
"Bank mortgage lenders will need to carry higher capital against mortgage loans, demanding higher returns," KBW said.
For consumers that means less competition will lead to higher mortgage costs across the industry, particularly on adjustable rate loans, CNBC said, citing KBW.
"The financial metrics that allowed thrifts to be profitable — high loan-to-deposit ratios, low expenses, and high leverage — are no longer possible," KBW said. "The loss of the thrift industry has broad implications for mortgage finance in the future."
The changes are part of the new regulatory environment that’s evolved since the 2008 financial crisis and are part of the Fed’s final plan to implement Basel III, according to a blog on The Wall Street Journal’s website.
Savings and loans institutions will be impacted more directly by the changes because they have relied heavily on mortgage lending, the Journal said, citing the research. Savings and loans also tended to be more highly leveraged, allowing them to offer lower rates while also making them more vulnerable to housing downturns, such as the 2008 collapse of Washington Mutual.
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