Mutual Savings Bank Disadvantages

Mutual savings banks operate branches in their local areas.

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A mutual savings bank is a financial savings institution that, unlike a bank, does not issue stock or have shareholders. Instead, a mutual savings bank is owned by its depositors, referred to as members, who receive all of the firm's unretained profits as dividends. Mutual savings banks are authorized and chartered for existence in 17 states and are managed by a board of trustees.

No Member Control

Mutual savings banks, like credit unions and most savings and loan institutions, are mutual associations. They are owned but not controlled by depositors. Although they're governed by a board of trustees, the board's makeup -- depending on the state -- can remain the same for years, meaning that managers of a mutual savings bank essentially self-govern. The managers answer to the board of trustees, but that board does not answer to anyone; this is unlike a corporation's board of directors, whose members answer to and have a fiduciary duty to the corporation's shareholders. Members have no direct voting power and cannot vote to remove trustees. Members "vote" by removing their deposits.

Conservative Tendencies

Most states place limits on the executive compensation at mutual savings banks. These may be actual caps on compensation or the threat of prosecution. The manager's compensation is closely tied to maintaining deposits and the financial health of the organization. Pursuing higher revenues translates into a higher reserve requirement and increased personal oversight of performance; this gives mutual savings bank managers a stronger incentive to maintain the safety of their deposit and investment portfolios to justify the compensation they receive.

Geographic and Other Limitations

Mutual savings banks are geographically and numerically limited. The 17 authorizing states are primarily located in the Northeast, Mid-Atlantic and Midwest regions. In addition, the number of mutual savings banks dropped significantly in the 1980s when many failed, merged or converted to stock-issuing bank or commercial banks in response to rising interest rates and asset restrictions. Mutual savings banks were governed by laws that restricted what they could invest in and what interest rates they could pay customers. This prevented them from adapting to the changing economy.

Conversion to Stock-Based

Some depositors prefer to keep their money at an institution that is owned by members, locally focused and highly conservative. However, more mutual savings banks are converting to stock-owned banks and issuing stock via an initial public offering. Depositor-members often get the first right of refusal to purchase shares, but not always. The risk of a growing, profitable bank going public or being acquired by a stock-based or commercial bank may increase with its growth and profitability.