What Is the Difference Between a Commercial Bank and a Savings & Loan Bank?

Both commercial banks and savings and loan associations have similar characteristics. In fact, for many retail customers, they may appear identical. Both commercial banks and S&Ls can be chartered by the states where they reside or the federal government. There are, however, significant differences between them -- in their origins, regulation and purpose.

The primary function of commercial banks is to make commercial and personal loans. On the asset side of their balance sheet, commercial banks, as their name implies, make most of their loans to consumers and businesses, typically short term, although they also make mortgage loans. Their liabilities include demand deposits (checking accounts), savings accounts, also withdrawable on demand, and longer-term certificates of deposits. Over time, the commercial banking sector has become the largest and most diversified of all financial institutions in the United States.

Savings and loan associations were formed as community-oriented organizations whose function was to foster home ownership. They experienced a tremendous growth spurt following World War II, with S&L assets increasing twenty-fold. The liability side of their balance sheet was historically dominated by passbook savings accounts paying depositors 3.75 percent. Each depositor had a passport-sized passbook where all transactions were recorded. The vast majority of S&L assets were 30-year conventional mortgages. There is a subset of this industry known as mutual savings banks. These organizations are similar to S&Ls in function, but they are owned “mutually” by their depositors.

The savings and loan crisis of the 1980s was precipitated in large part by the unique features of the S&Ls and the way they were regulated. When inflation reached double-digit levels in the late 1970s and early 1980s, newly formed money market funds paying market interest rates began siphoning off deposits from S&Ls that were limited to 3.75 percent interest. On the other side of the balance sheet, S&Ls were locked in to long-term mortgage portfolios that paid them below-market yields. Caught in a trap, S&Ls responded by offering newly deregulated high-yield deposits, while making riskier loans to raise the yields on their loan portfolios. When high-risk loans defaulted, many S&Ls became insolvent.

With the advent of online banking and following the the S&L collapse and the financial crisis of 2008, the face of banking in the United States has changed, with commercial banks and S&Ls moving closer together in appearance and function. Banks have lost market share of commercial loans, as customers found alternative sources for borrowed funds. Banks, which were once limited to operating in single states, now are coast-to-coast with international operations. The S&Ls that survived the crisis -- roughly 70 percent disappeared -- now offer a range of deposit alternatives, although their loans remain by law overwhelmingly in mortgages. Both commercial banks and S&Ls compete with brokerage firms and insurance companies for customers.