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Chapter 10: Q.7 (page 283)

Would you recommend the adoption of a system of deposit insurance, like the FDIC in the United States, in a country with weak institutions, prevalent corruption, and ineffective regulation of the financial sector?

Short Answer

Expert verified

No. You would probably not recommend the adoption of a system of deposit insurance in a country with weak institutions, prevalent corruption and ineffective regulation of the financial sector.

Step by step solution

01

Step 1:Concept Introduction

The Federal Deposit Insurance Corporation is a free government office protecting stores in U.S. banks and frugality in case of bank disappointments. Starting in 2020, the FDIC protects stores up to 250,000 per contributor as long as the establishment is a part firm.

02

:Explanation

The FDIC endeavors to safeguard enormous investors on the grounds that the vast majority of these are held by organizations and their misfortune might cause their disappointment, with negative repercussions for the neighborhood economy, and it might cause bank runs by huge contributors on different banks, which might accelerate their disappointment.

03

Final Answer

No. You would probably not recommend the adoption of a system of deposit insurance in a country with weak institutions, prevalent corruption, and ineffective regulation of the financial sector.

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Most popular questions from this chapter

Suppose Universal Bank holds 100million in assets, which are composed of the following:

Required reserves:10million

Excess reserves: 5million

Mortgage loans: 20million

Corporate bonds: 15million

Stocks: 25million

Commodities: 25million

Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as assets? Why or why not?

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.

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?

How does bank chartering reduce adverse selection problems? Does it always work?

Suppose that you have 300000in deposits at a bank. After careful consideration, the FDIC decides that this bank is now insolvent. Which method would you like to see the FDIC apply? What if your deposit were 200000?
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