One way to enhance the stability of the banking system is to
A) require higher bank capitalization, or net worth.
B) increase the federal funds rate.
C) reduce the required reserve ratio.
D) require more leveraging by banks.

Question

Quizplus · Accepted Answer

Requiring higher bank capitalization means that banks must have a higher net worth, which provides a cushion in case of losses. This can enhance the stability of the banking system because banks will be less likely to fail and require government bailouts. Increasing the federal funds rate would make borrowing more expensive for banks, but it does not necessarily address the issue of bank stability. Reducing the required reserve ratio would provide banks with more funds to lend, but it could also increase the risks of bank failures. Requiring more leveraging by banks would actually increase the risks of bank failures because it would mean that banks are relying more heavily on debt financing.

One Way to Enhance the Stability of the Banking System