Question

Discuss bank panics, and the role of deposit insurance.

How does the FDIC handle the resolution of a bank that may fail?

Answer 1

1.Bank panics is a series of unexpected cash withdrawals caused by a sudden decline in depositor confidence and fear that the bank will be closed by the chartering agency. It is the fear that investors will lose their deposits so they rush into to liquidate their deposits.

In other words a bank panics is a financial crisis that occurs when many banks suffer runs at the same time, as people suddenly try to convert their threatened deposits into the liquid cash or get out with any transaction with bank.

2. The role of deposit insurance are:

A. The deposit insurance corporation manages and invests the fund and is thus able to provide insurance coverage for deposits and provides a Securitiies against the deposits.

B. Deposit insurance corporation is empowered to borrow and special premiums may be levied on all member institutions should be demand on the fund exceed its resources.

C. It provides with a protection to the depositors against the credit institutions so they should not panic when the bank defaults.

3.The timely and effective resolution of a failed institutions is an important element in financial safety net arrangements.

FDIC is a proactive organization which is formed to avoid Situation like bank panics .When it realises the Bank is about to fail, FDIC takes immediate action to resolve it by selling the franchise of defaulting bank including it's assets and loans in order to protect the interests of deposit holders.