Management Chapter 15 Psychological Research Has Shown That People Tend Make Wiser Purchasing Decisions When

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PPT 15.41

B. Decided to invest his life savings and open Optometrics to manufacture

and market his invention

C. Uncertain about the “financial side” of business and the various

functions of different financial institutions

1. Aware he will need financial services:

a. Checking and savings account

b. Various short-term investments that can easily/quickly be

converted to cash as needs dictate

c. Sources of borrowing capacity should need for short- or long-

term loans arise

D. Despite Hill’s research:

E. Discussion questions:

1. List the various types of U.S. financial institutions and the primary

function of each.

The various types of U.S. financial institutions include commercial

banks, savings and loan associations, credit unions, and mutual

savings banks. Commercial banks are financial institutions that hold

deposits for individuals and businesses and loan most of the

deposited funds to businesses, individuals, and government

agencies. Savings and loan associations (S&Ls) are financial

institutions that primarily offer savings accounts and make long-term

loans for residential mortgages. Credit unions are financial

From savings and loan associations or mutual savings banks, Hill

would need savings account services and perhaps mortgage services

if he chooses to use his personal home to finance his business

operation. Finally, from a credit union Hill would need checking and

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3. Which single financial institution is likely to be best able to meet

Hill’s small company’s needs now? Why?

Hill’s new company is likely to need the services of a commercial

bank. Specifically, it will need services such as short- and long-term

financing, corporate (and/or personal) checking accounts, and the

availability of short-term investments (money market accounts,

certificates of deposit, and so forth). In addition, many commercial

banks also offer financial consultation to small business owners, a

service Hill may find desirable. Credit unions represent another

possibility if one is available in his area that provides services for

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B O X E D T E X T D I S C U S S I O N Q U E S T I O N S

ENTER THE WORLD OF BUSINESS—The Good and the Bad of a Cashless Society

A cashless society would involve further development and integration of technology, big data, and cashless

payment methods. More than 80 percent of consumer transactions in the United States are electronic, and

1. What are some positive implications of a cashless society?

2. What could be some disadvantages to a cashless society?

Critics feel that a cashless society could be used to control consumer purchasing. For instance, algorithms

are currently used to alert debit and credit card users of fraud. While these technologies protect

3. Why do you think using cash is more effective for making wiser purchasing decisions?

Students’ answers may vary. One reason could be that paying with electronic payments does not make

the charge as real as handing over physical cash.

GOING GREEN—Banks Increase Investment in Sustainability

Banks not only want to incorporate greener processes into their operations, but they are also investing in

green technology initiatives. Goldman Sachs has pledged $40 billion toward solar, wind, energy storage, and

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1. Discuss some of the ways in which banks are investing in sustainability.

In addition to reducing its paper and energy consumption, Bank of America is investing in projects that

2. What are the advantages of investing in sustainability? The disadvantages?

3. Do you think Wells Fargo’s sustainability goals represent a genuine commitment, or are they more

window-dressing to make the company look good?

Students’ answers will vary.

CONSIDER ETHICS AND SOCIAL RESPONSIBILITY—Unregulated Bitcoin Industry Has Regulators Worried

Bitcoin is a digital currency that can be used to make purchases without the use of cash, credit, or debit

cards. Bitcoins are not backed by the government, not circulated by banks or other intermediaries, and not

1. How does Bitcoin differ from other forms of currency?

2. What are some of the ethical concerns involved with Bitcoin?

3. Why do you think investors are interested in Bitcoin?

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S U P P L E M E N T A L L E C T U R E

The Federal Reserve System

The Federal Reserve System monitors the nation’s money supply and tries to exert some influence over it.

The exact nature of the relationship between the money supply and inflation is best treated by a panel of

Reserve Requirement

One of several roles of the Federal Reserve System is to regulate commercial banks that have elected to

affiliate themselves with the system. One facet of this control is setting the reserve requirement. As you

know, banks maintain accounts for depositors and also lend funds to borrowers. This arrangement works

Discount Rate

Our Federal Reserve System is often called the banks’ bank. This means that when a commercial bank has

banking needs, it can turn to the Fed. If a commercial bank needs to borrow funds beyond an overnight

period, it may borrow from the Fed. The interest rate the Fed will charge such a commercial bank is called

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securities markets that higher interest rates are coming. We use the term unofficial because it is often not

the discount rate that leads or initiates movements of interest rates.

Open Market Operations

Many economists believe that open market actions are the Fed’s most significant and effective tactic. The

Federal Open Market Committee of the Federal Reserve System (known as the FOMC) meets on a regular

basis and decides what moves to make in securities issued by the United States Treasury Department.

1. How does the Federal Reserve System control the money supply?

2. Why is the Fed sometimes called the “banks’ bank”?

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C O N T R O V E R S I A L I S S U E

Does Insurance for Banking Institutions Reward Reckless Decisions of Institutions and Depositors?

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to help protect deposits. In the

early 1930s, nearly 4,000 banks failed. Many banks failed because of depositor “runs” on banks, when huge

numbers of depositors demanded their money at the same time. Many financially sound and prudently run

The news media widely reported the savings and loan failures of the 1980s, many of which were caused by

the collapse of the real estate and construction industries, particularly in Texas and California. As developers

and managers of real estate and construction companies were unable to repay their loans, many savings and

loans or banks had financial difficulties or failed. Most of their depositors, protected by the FDIC or FSLIC,

were repaid up to $250,000 per account. The FSLIC did not have enough money to pay all depositors of failed

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Should depositors have some responsibility? Some in the banking industry have suggested two ways to deal

with depositor responsibility that might enhance wiser consumer choices of banking institutions: (1) insuring

1. Should all depositor accounts be protected up to $250,000?

Students’ answers will vary.

2. Why is it wise to provide insurance for bank deposits?

It is wise to provide insurance for bank deposits so that depositors will not panic and remove all of their

money from banks at once. This widespread panic helped to create the Great Depression. To avoid this

S O Y O U’R E I N T E R E S T E D I N F I N A N C I A L S Y S T E M S O R B A N K I N G

Why are internships a good way to try out an industry before going into it as a career?

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C H E C K Y O U R P R O G R E S S

1. What are the six characteristics of money? Explain how the U.S. dollar has those six characteristics.

a. Acceptability—the dollar is acceptable as payment for goods and services and settlement of debts.

b. Divisibility—money must be divisible into small units to facilitate exchanges. The dollar is divisible

into pennies, nickels, dimes, and quarters.

2. What is the difference between a credit card and a debit card? Why are credit cards considerably more

popular with U.S. consumers?

3. Discuss the four economic goals the Federal Reserve must try to achieve with its monetary policy.

The Fed must promote stable, long-term economic growth; high levels of employment; stable prices; and

4. Explain how the Federal Reserve uses open market operations to expand and contract the money

supply.

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5. What are the basic differences between commercial banks and savings and loans?

6. Why do credit unions charge lower rates than commercial banks?

7. Why do finance companies charge higher interest rates than commercial banks?

8. How are mutual funds, money market funds, and pension funds similar? How are they different?

9. What are some of the advantages of electronic funds transfer systems?

G E T I N V O L V E D

1. Survey the banks, savings and loans, and credit unions in your area, and put together a list of interest

rates paid on the various types of checking accounts. Find out what, if any, restrictions are in effect for

NOW accounts and regular checking accounts. In which type of account and in what institution would

you deposit your money? Why?

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2. Survey the same institutions as above, this time inquiring as to the rates asked for each of their various

loans. Where would you prefer to obtain a car loan? A home loan? Why?

Students’ answers will vary depending upon their locations.

B U I L D Y O U R S K I L L S

Author’s Note: This exercise is designed to have students research (through the Yellow Pages, Chamber of

Commerce, Internet, etc.) available financial services in the local area. This chapter provides the professor

1. There are a wide variety of banking and nonbanking institutions that can help individuals manage money.

Banking institutions include commercial banks, savings and loans, and mutual savings banks. Nonbank

2. Each of the institutions mentioned in the answer to the first question has traditionally specialized in

limited products. For example, savings and loans primarily made housing loans, brokerage firms primarily

sold securities to the public, and insurance companies sold life, property, and casualty insurance.

However, in the past few decades, a consolidation of financial services has been taking place.

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3. Student research should include information on Social Security. Discussion could center on whether

students feel Social Security alone will provide for their retirement and if not, alternative strategies they

may use for retirement planning. Research should also include information about Individual Retirement

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B U I L D Y O U R B U S I N E S S P L A N

Have students estimate the revenues for the first three months of operation of the Thai Restaurant. This will

force them to think of what the average bill will be for lunch and/or dinner, and how many times the tables

S E E F O R Y O U R S E L F V I D E O C A S E:

C O N T R O V E R S Y O V E R B A N K L E N D I N G P O L I C I E S

Case Overview

This case discusses the economic impact of the lack of lending to individuals and small businesses following

the recent economic recession. Small businesses rely on credit, often using loans to survive slow periods or to

finance their expansion. Without this vital resource, many companies have to lay off workers or shut down

1. While it does involve taking on debt, why is credit so important for businesses to function?

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2. How do you think people can improve their credit scores in order to look more attractive for loans?

3. How might a lack of demand for business credit affect the economy?

If the banks are correct and there is a lack of demand for business credit, then it means businesses are

T E A M E X E R C I S E

Mutual funds pool individual investor dollars and invest them in a number of different securities. Students

T E R M P A P E R O R P R O J E C T T O P I C S

These topics may be assigned as individual or collaborative projects:

1. History of Banking in the United States

3. Security Concerns with Automated Teller Machines (ATMs)

5. Social Security: The United States’ Largest Pension Plan

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G U E S T S P E A K E R S U G G E S T I O N S

1. A representative from any one of the following institutions: commercial bank, savings and loan

3. A representative of a firm providing private pension plans.

5. A professor specializing in banking and finance to speak about topics pertinent to the chapter.

T E A C H I N G S U G G E S T I O N S

1. Start out by having the class read an article related to banking that you select from The Wall Street

3. The “Supplemental Lecture” provides additional material about the Federal Reserve System, and the

“Controversial Issue” focuses on some issues involved in the banking crisis.

4. Cover “Get Involved” in class. Also, Exercise 1 would be appropriate for class discussion. “Additional

5. Exercise 2, a survey of banks, savings and loans, and credit unions in your area, could be used as a group