When the government guarantees a troubled bank's liabilities:
A)the bank is merged into the Federal Reserve System and becomes a Federal Reserve bank.
B)the owners of the bank must pay a fee to receive the guarantee.
C)the government takes over the bank temporarily and then reprivatizes the bank by selling it to private investors.
D)the bank is permanently closed.

Question

Quizplus · Accepted Answer

When the government guarantees a troubled bank's liabilities, it takes over the bank temporarily and then reprivatizes the bank by selling it to private investors. This approach is known as temporary nationalization. The government may also inject capital into the bank to provide liquidity and stabilize the financial system. Option A is not a viable solution because merging a bank into the Federal Reserve System would not provide a guarantee of liabilities. Option B is incorrect because the owners of the bank would not pay a fee to receive the guarantee; instead, the government would use taxpayer funds to provide the guarantee. Option D is incorrect because permanently closing a bank would not be an efficient solution, as it can lead to a run on other banks and cause a systemic crisis.

When the Government Guarantees a Troubled Bank's Liabilities