Key Concepts
1. Describe the savings institution’s main sources and uses of funds.
2. Compare the sources and uses of funds between savings institutions and banks to explain why the
savings institution’s exposure to risk differs from that of banks (especially interest rate risk).
3. Explain the cause of the credit crisis in 2008-2009, and the solutions.
4. Explain the sources and uses of funds for credit unions.
POINT/COUNTER-POINT:
Can All Savings Institutions Avoid Failure?
POINT: Yes. If savings institutions use conservative management by focusing on adjustable-rate
mortgages with limited default risk, they can limit their risk and avoid failure.
COUNTER-POINT: No. Some savings institutions will be crowded out of the market for high-quality
adjustable-rate mortgages and will have to take some risk. There are too many savings institutions and
some that have weaker management will inevitably fail.
WHO IS CORRECT? Use InfoTrac or some other source search engine to learn more about this issue and
then formulate your own opinion.
ANSWER: When economic conditions are weak, mortgage loan defaults will occur. When interest rates
rise, savings institutions that provide fixed-rate mortgage loans will be adversely affected. Savings
institutions can limit their exposure, but then their return may not be sufficiently high to satisfy
shareholders. Therefore, some savings institutions will likely fail during a weak economy or rising
interest rates.