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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

01

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.

02

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.

03

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

What are the costs and benefits of a too-big-to-fail policy?

Oldhat Financial starts its first day of operations with \(11million in the capital. A total of \)120million in checkable deposits are received. The bank makes a \(30million commercial loan and another \)40million in mortgages with the following terms: 200standard, 30-year, fixed-rate mortgages with a nominal annual rate of 5.25%, each for $200,000. Assume that required reserves are 8%.

a. What does the bank balance sheet look like?

b. How well capitalized is the bank?

c. Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat’s first day.

Consider a bank with the following balance sheet:

AssetsLiabilities
Required reserves \(9millionCheckable deposits \)90million
Excess reserves \(2millionBank capital \)6million
T-bills \(46million
Commercial loans\)39million

The bank makes a loan commitment for $15million to a commercial customer. Calculate the bank’s capital ratio before and after the agreement. Calculate the bank’s risk-weighted assets before and after the agreement. Problems 19–21 relate to a sequence of transactions at Oldhat Financial.

What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it?

Banking crises have occurred throughout the world, like the Finnish banking crisis of 1990s, the 2002 Uruguay banking crisis, and the 2003 Myanmar banking crisis. In this context, what similarity do we find when we look at various different countries?
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