During the early 1930s, there were a number of bank failures. To combat these bank failures...

During the early 1930s, there were a number of bank failures. To combat these bank failures central banks implemented depositor insurance. Assess the effectiveness of this policy including any issues that may arise with such a policy.

Expert Solution

In 1930, a great depression hits the financial sector due to which financial crisis occured. Many of the banks became insolvent due to which people looses their confidence towards this sector and started withdrawing their money. It further lead to worsen the situation.

To overcome the problem of financial crisis, central bank introduced depositor insurance under which an individual who deposited money in the banks will get some assurance to get back their money. This insurance introduced as one of the functions of central bank as the lender of last resort. If any bank or financial institite fails to pay back money in a very shorter time period, central bank will pay on behalf of it so that a depositor can feel secure.

This policy was effective to keep the track or regain the stability in the financial sector as it increases depositor’confidence and helps financial institutions to improve their functioning as central bank gave support to these institutions.

Rahul Sunny answered 2 years ago

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During the early 1930s, there were a number of bank failures. To combat these bank failures...

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