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Financial Regulation

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Questions and Answers

Which of the following is a reason for the existence of deposit insurance?

To allow the FDIC to reorganize failed banks

To separate good banks from bad banks

To prevent bank panics

To ensure that depositors do not lose money in bank failures (correct)

What is the maximum amount that the FDIC will pay off to depositors in case of a bank failure?

$100,000

$500,000

$250,000 (correct)

$1,000,000

What is the problem with the pay off method of handling failed banks?

Depositors may need to pay a fee to receive their payment

Depositors may receive less than the full amount of their deposit

Depositors may not receive any payment (correct)

Depositors may need to wait for a long time to receive their 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 Signup and view all the answers

What is the source of funds for the FDIC to pay off depositors in case of a bank failure?

Other banks with FDIC insurance Signup and view all the answers

Which of the following is NOT a concern related to moral hazard in insurance arrangements?

Higher insurance premiums Signup and view all the answers

What is one potential consequence of FDIC insurance on banks?

Increased risk-taking Signup and view all the answers

Why do depositors and creditors not impose marketplace discipline on financial institutions with FDIC insurance?

They are protected from losses Signup and view all the answers

What is adverse selection in the context of FDIC insurance?

The selection of banks with higher risk profiles Signup and view all the answers

How might a low deductible on automobile collision insurance affect driver behavior?

Encourage reckless driving Signup and view all the answers