Q.1 Why are deposit insurance and ot... [FREE SOLUTION] (2024)

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Chapter 10: Q.1 (page 283)

Why are deposit insurance and other types of government safety nets important to the health of the economy?

Short Answer

Expert verified

Deposit insurance Realizing that their stores are safeguarded against potential bank disappointments, purchasers are more ready to share their cash with banks.

Step by step solution

Step 1:Concept Introduction

Deposit insurance is an action executed in numerous nations to safeguard bank investors, in full or to a limited extent, from misfortunes made by a bank's powerlessness to pay its obligations when due.

Step 2:Explanation

Deposit insurance and different sorts of government wellbeing nets are essential to the strength of the economy since they instill confidence in the public. Realizing that their stores are safeguarded against potential bank disappointments, purchasers are more ready to share their cash with banks. This provides saves money with a wellspring of subsidizing to make advances, which energizes the economy by getting assets to those with expected ventures. Banks likewise benefit from revenue gathered on these credits.

Step 3:Final Answer

Deposit insurance instills confidence in the public. Realizing that their stores are safeguarded against potential bank disappointments, purchasers are more ready to share their cash with banks.

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Most popular questions from this chapter

How does bank chartering reduce adverse selection problems? Does it always work?To avoid insolvency, regulators decide to provide the bank with \(27 million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a result, \)40 million in deposits is withdrawn. Show the effects of the capital injection and the bank run on the balance sheet. Was the capital injection enough to stabilize the bank? If the bank regulators decide that the bank needs a capital ratio of 10% to prevent further runs on the bank, how much of an additional capital injection is required to reach a 10% capital ratio? Suppose that after a few mergers and acquisitions, only one bank holds 70% of all deposits in the United States. Would you say that this bank would be considered too big to fail? What does this tell you about the ongoing process of financial consolidation and the government safety net?What are some of the limitations to the Basel and Basel 2 Accords? How does the Basel 3 Accord attempt to address these limitations?How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

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