Question

Creation of the FDIC encouraged reluctant depositors to put their money into the banking system.

a) Aside from the benefit of reducing the probability of bank runs, what other positive impact has this policy had in the performance of the overall economy?

b) How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

Answer 1

a) Aside from the benefit of reducing the probability of bank runs, what other positive impact has this policy had in the performance of the overall economy?

Supervision:

1. In addition to minimizing the risk of bank runs, the FDIC has legislative obligations for some bank holding firms and nonbank financial firms that are classified as systemically important. The FDIC and FRB are collectively responsible for reviewing and assessing resolution proposals established by these organizations that show how they can be resolved efficiently and in an orderly manner within U.S Bankruptcy Code in the event of financial distress.

2. The FDIC promotes safe and sound financial institution practices through regular risk management reviews, the publication of guidance and policy, ongoing communication with industry officials, and review of FDIC-supervised institutions' requests to expand their activities or locations. The FDIC has a number of informal and formal compliance options available, where necessary, to address protection and soundness issues found at these institutions. The FDIC also has personnel committed to conducting off-site surveillance services and to improving the capacity of the agency to recognize emerging security and soundness problems in a timely manner.

3. The FDIC promotes compliance with consumer protection, fair lending, and community reinvestment laws by FDIC-supervised institutions through a variety of activities, including ongoing communication with industry officials, regular compliance and Community Reinvestment Act (CRA) reviews, dissemination of information to consumers about their rights and required disclosures, and investigation; The FDIC also has a range of informal and formal enforcement options available at these institutions and their institution-affiliated parties to resolve compliance issues.

4. In performing its supervisory obligations, the FDIC pursues the following three strategic priorities as the main federal regulator for non-member state banks and savings institutions, as well as the backup regulator for other FDIC-insured institutions and the inspector of resolution plans:

• FDIC-insured institutions are safe and sound.
• Consumers’ rights are protected and FDIC-supervised institutions invest in their communities.
• Large and complex financial institutions are resolvable in an orderly manner under bankruptcy

Resolutions are orderly and receiverships are managed effectively:

• Receiverships are achieved in optimizing net return and ending in an orderly and timely way.
• Potential recoveries are investigated and sought, including lawsuits against employees, if considered meritorious and likely to be cost-effective.
• Pursuant to legislative requirements, the resolution of the collapse of a big, complex financial institution is carried out in an organized way

b. How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

The rising amount of premiums for deposit insurance helps mitigate the moral hazard and adverse selection loan issues. The riskier assets stem from loan issuance. The increasing premiums for deposit insurance put control over the degree of risk banks are taking. This reduces the percentage of riskier assets and ends up helping the economy.