Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 12: Q.8 (page 343)

Some countries do not advertise that a system of deposit insurance like the FDIC in the United States exists in their banking system. Explain why some countries would want to do that.

Short Answer

Expert verified

Unlike the FDIC here in the United States, some banks overseas do not advertise their deposit insurance coverage. For this reason, the borrower will be relaxed since he perceives that the bank will be covered in case of a loan default. Bank losses will accumulate as a result.

Step by step solution

01

Definition

The interest rate on risk-free assets is lower because of the surety that the amount will be paid back. The lower risk level causes the default-free assets.

Deposit insurance is the insurance to the depositors or the creditors of the bank in case the banks fail to repay their money.

02

Explanation

This is because if they do so, it will affect the market discipline and the borrower will be relaxed since they will perceive that the banks have an insurance shield to recover the losses on loans.

This will lead to losing the accumulation of the bank.

03

Final Answer

Therefore, some countries have it to protect the downfall of the banks of the country and to save the economy from the financial crisis.

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

Provide one argument in favor of and one against the idea that the Fed was responsible for the housing price bubble of the mid-2000s.

How does a deterioration in the balance sheets of financial institutions and the simultaneous failures of these institutions cause a decline in economic activity?

Define “financial frictions” in your own terms and explain why an increase in financial frictions is a key element in financial crises.

How did a decline in housing prices help trigger the subprime financial crisis that began in 2007 ?

What is a credit spread? Why do credit spreads rise significantly during a financial crisis?
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