Question

Great depression (1929) triggered the initiation of some safety net institutions, Federal Deposit Insurance Corporation (FDIC) was one of it, explain this decision with a highlight on the main risk that governments were trying to mitigate.

Answer 1

FDIC is an agency to provide deposit insurance to customer/depositors which include depositors in US commercial banks and saings bank. The FDIC which was incorporated in 1933 aims to reinstate the trust among depositors and to avoid Bank runs which was common during the great depression.

To receive the benefit from FDIC member banks should adhere certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:

• Well capitalized: 10% or higher
• Adequately capitalized: 8% or higher
• Undercapitalized: less than 8%
• Significantly undercapitalized: less than 6%
• Critically undercapitalized: less than 2%

These requirements are mainly done to reduce bank runs and to reduce the insolvency of a bank. There should be adequate capital in abank to serve to its customers during a distress situation. This eventually will bring the trust among the customers for the banking sector which is the most important aspect in financial world.