Negative externalities exist in the depository sector when

Question

Quizplus · Accepted Answer

All of the above choices create negative externalities in the depository sector.

A) The fear of DI insolvency leads to bank deposit runs, which not only affect the specific DI but can also have ripple effects on other DIs in the sector.

B) Lending activity may be impaired or constrained if DIs are hesitant to extend credit due to concerns over the health of other DIs in the sector.

C) Delays in disbursements from insolvent DIs can negatively impact their customers who may rely on those funds for their own financial stability.

D) When a bank nears insolvency, healthy banks can suffer due to contagion effects if customers start to withdraw their funds from all DIs, not just the one in question.

Negative Externalities Exist in the Depository Sector When