Log out Go to App
Go to App

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Early the next day, the bank invests \(35million of its excess reserves in commercial loans. Later that day, terrible news hits the mortgage markets, and mortgage rates jump to 13%, implying a present value of Oldhat’s current mortgage holdings of \)99838 per mortgage. Bank regulators force Oldhat to sell its mortgages to recognize the fair market value. What does Oldhat’s balance sheet look like? How do these events affect its capital position?

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 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.

Why can government safety nets create both an adverse selection problem and a moral hazard problem?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free