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Chapter 15: Problem 14

In a program of deposit insurance as it is operated in the United States, what is being insured and who pays the insurance premiums?

Short Answer

Expert verified
In the United States deposit insurance program, the insured entity is the depositor's bank or credit union account, with each account being insured up to a limit of $250,000. The parties responsible for paying insurance premiums are the insured financial institutions - banks and credit unions, who are charged periodic fees by the Federal Deposit Insurance Corporation (FDIC).

Step by step solution

01

Introducing Deposit Insurance

Deposit insurance is a protection provided to depositors of banks and other financial institutions in case the institution fails or goes bankrupt. The purpose of deposit insurance is to maintain trust in the banking system and prevent a chain reaction of panic withdrawals or bank runs. In the United States, deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC).
02

Insured Entity

In the U.S., the insured entity under a deposit insurance program is the depositor's bank or credit union account. Each depositor's account, whether it is a checking, savings, or other types of account, is insured up to a certain limit, currently set at $250,000. This means that if the financial institution fails, the depositor is entitled to a reimbursement of their funds up to the insured limit, as long as the financial institution is FDIC-insured.
03

Party Paying Premiums

In the U.S.'s deposit insurance program, the parties responsible for paying insurance premiums are the insured financial institutions - banks and credit unions. These institutions are charged periodic fees (insurance premiums) by the FDIC. The institutions may pass on some of these costs to their customers in the form of lower interest on deposits or higher fees. However, the direct responsibility for paying premiums falls on the insured banks and credit unions. To summarize, in the U.S. deposit insurance program, the insured entity is the depositor's account at an FDIC-insured financial institution, and the insurance premiums are paid by the banks and credit unions themselves.

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