Question 1

Insured depositors can be covered for much more than $250,000 at any given FI under current FDIC regulations.

Accepted Answer

Insured depositors can be covered for up to $250,000 per ownership category (such as individual accounts, joint accounts, etc.) at any given FI. However, if a depositor has accounts in multiple ownership categories, they can be covered for more than $250,000. For example, if someone has $250,000 in an individual account and $250,000 in a joint account with a spouse, both accounts would be fully insured for a total coverage of $500,000. Additionally, some types of accounts such as retirement accounts and trust accounts may be eligible for higher insurance coverage.

Question 2

The FDIC deposit insurance program is also available to credit unions.

Accepted Answer

Credit unions are not covered by the FDIC (Federal Deposit Insurance Corporation); instead, they are insured by the National Credit Union Administration (NCUA) through the National Credit Union Share Insurance Fund (NCUSIF).

Question 3

The insured depositor transfer method of least-cost bank failure resolution requires the FDIC to employ the method that imposes the highest amount of failure costs on uninsured depositors.

Accepted Answer

The answer of The insured depositor transfer method of least-cost...

Question 4

The current "too big to fail" policy doctrine relies on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.

Accepted Answer

The current "too big to fail" policy doctrine does not rely on the separation of small and large depositors in terms of deposit insurance coverage. Rather, it is focused on preventing the failure of large, systemically important financial institutions and minimizing the potential negative impact on the broader economy.

Question 5

The deposit insurance programs of the National Credit Union Administration (NCUA) is modeled after the programs offered by the FDIC.

Accepted Answer

The NCUA's deposit insurance program is indeed modeled after the FDIC's program, in order to provide similar protections to credit union members as those provided to bank depositors.

Question 6

The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC.

Accepted Answer

The 1993 Depositor Protection legislation does not give equal claim to foreign uninsured depositors, domestic uninsured depositors, and the FDIC. The FDIC typically has priority in recovering funds from liquidated assets.

Question 7

FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline.

Accepted Answer

FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991) was designed to enhance regulatory discipline while also increasing stockholder and depositor discipline, not substituting it. It introduced more stringent regulatory measures to ensure the stability and accountability of financial institutions, rather than replacing the role of stakeholders in monitoring and disciplining these institutions.

Question 8

The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations.

Accepted Answer

The PBGC was created by the Employee Retirement Income Security Act (ERISA) of 1974 to insure defined benefit pension plans against the possibility of plan termination due to insufficient funding by employers.

Question 9

The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates.

Accepted Answer

The FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989) imposed restrictions on brokered deposits and interest rates for institutions that are not well capitalized, but it did not outright prohibit all insured financial institutions from accepting brokered deposits or paying higher interest rates. It allowed well-capitalized institutions some flexibility in these areas.

Question 10

Interest rates charged to healthy banks that use the Federal Reserve discount window are typically set one percent below the fed funds target interest rate.

Accepted Answer

Interest rates charged to healthy banks that use the Federal Reserve discount window are not necessarily set at a specific margin below the fed funds target interest rate. The rate is determined by the Fed on a case-by-case basis and may be either above or below the target rate, depending on the circumstances.

Question 11

By decreasing the use of the discount window as a source of funding for a DI, the Federal Reserve hopes to reduce volatility in the fed funds market.

Accepted Answer

The Federal Reserve uses the discount window as a mechanism to provide liquidity to depository institutions (DIs), ensuring stability in the financial system rather than directly aiming to reduce volatility in the fed funds market. The fed funds market volatility is more directly influenced by open market operations and the Federal Reserve's policy decisions regarding interest rates.

Question 12

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank.

Accepted Answer

The answer of The employment of deposit brokers allows individual...

Question 13

Brokers who break up large deposits into smaller units at different banks to ensure full coverage by deposit insurance are referred to as deposit brokers.

Accepted Answer

This statement is true. Deposit brokers specialize in dividing large deposits into smaller units to ensure that each individual account is fully insured by the FDIC or NCUA.

Question 14

State guaranty funds for insurance companies are sponsored by state insurance regulators rather than by a federal agency such as the FDIC.

Accepted Answer

State guaranty funds are regulated and sponsored by state insurance regulators, not a federal agency like the FDIC.

Question 15

The discount window at the Federal Reserve is a suitable substitute for deposit insurance and a possible method of preventing bank runs.

Accepted Answer

The discount window is not a substitute for deposit insurance as it is primarily a tool for providing short-term liquidity to banks. While it can help prevent bank runs by providing funding during times of stress, it does not guarantee the safety of depositors' funds like deposit insurance does.

Question 16

Critics of the current FDIC insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks.

Accepted Answer

Critics of the current FDIC insurance programs argue that insured depositors also have incentives to discipline riskier banks. Insured depositors may choose to withdraw their funds or shift them to safer, better-managed banks if they perceive their bank as taking on too much risk. This can lead to a loss of deposits for the riskier bank, which can then face financial difficulties. Therefore, insured depositors also have incentives to encourage banks to manage risk appropriately, not just uninsured depositors.

Question 17

The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company.

Accepted Answer

The answer of The required contribution from surviving insurers to...

Question 18

The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits.

Accepted Answer

The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits up to $250,000 per depositor.

Question 19

The introduction of prompt corrective action capital zones by FDICIA was an attempt to place greater decision-making power at the discretion of regulators rather than on objective, measurable rules.

Accepted Answer

The introduction of prompt corrective action (PCA) capital zones by the Federal Deposit Insurance Corporation Improvement Act (FDICIA) was aimed at creating objective, measurable rules for regulatory intervention based on a bank's capital levels, reducing the discretion of regulators by mandating specific actions based on those levels.

Question 20

During the 1980s, a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure.

Accepted Answer

During the 1980s, brokered deposits were often used by banks to fund risky loans and investments, leading to a higher proportion of brokered deposits being associated with a greater risk of failure. As a result, regulators viewed a high proportion of brokered deposits as a warning sign for potential bank failure.

Quiz 20: Deposit Insurance and Other Liability Guarantees