The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance.

Question

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Writing a put option gives the buyer of the option the right to sell an asset at a certain price. In this case, by providing deposit insurance, the FDIC is essentially writing a put option on the assets of the bank that buys the insurance. This means that if the bank fails and its assets are worth less than the insured deposits, the FDIC will be obligated to buy the assets at a predetermined price (i.e., the amount of insured deposits).

The Provision of Deposit Insurance by the FDIC Is Similar