10 Questions
Which of the following is a reason for the existence of deposit insurance?
To ensure that depositors do not lose money in bank failures
What is the maximum amount that the FDIC will pay off to depositors in case of a bank failure?
$250,000
What is the problem with the pay off method of handling failed banks?
Depositors may not receive any payment
What is the purchase and assumption method used by the FDIC?
The FDIC reorganizes the bank and finds a willing merger partner to take over all liabilities
What is the source of funds for the FDIC to pay off depositors in case of a bank failure?
Other banks with FDIC insurance
Which of the following is NOT a concern related to moral hazard in insurance arrangements?
Higher insurance premiums
What is one potential consequence of FDIC insurance on banks?
Increased risk-taking
Why do depositors and creditors not impose marketplace discipline on financial institutions with FDIC insurance?
They are protected from losses
What is adverse selection in the context of FDIC insurance?
The selection of banks with higher risk profiles
How might a low deductible on automobile collision insurance affect driver behavior?
Encourage reckless driving
Test your knowledge on the rationale behind financial regulation and the role of deposit insurance in preventing bank panics. Explore the concept of asymmetric information and how it affects the ability of depositors to assess the quality of a bank's assets. Learn about the government safety net provided by the FDIC and its impact on separating "good" banks from "bad" banks.
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