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Bank depositors in the U.S. are all financially protected [#permalink]
17 Aug 2005, 20:42
0% (00:00) correct
0% (00:00) wrong based on 2 sessions
Bank depositors in the U.S. are all financially protected against bank failure because the government insures all individuals' bank deposits. An economist argues that this insurance is partly responsible for the high rate of bank failures, since it removes from depositors any financial incentive to find out whether the bank that holds their money is secure against failure. If depositors were more selective, then banks would need to be secure in order to compete for depositors' money.
Which of the following, if true, most seriously weakens the economist's argument?
A. Before the government started to insure depositors against bank failure, there was a lower rate of bank failure than there is now.
B. When the government did not insure deposits, frequent bank failures occurred as a result of depositors' fears of losing money in bank failures.
C. Surveys show that a significant proportion of depositors are aware that their deposits are insured by the government.
D. There is an upper limit on the amount of an individual's deposit that the governement will insure, but very few individuals' deposits exceed this limit.
E. The security of a bank against failure depends on the percentage of its assets that are loaned out and also on how much risk its loans involve.
Can anyone explain further why B......why as a result of depositor's fear....that sounds odd!
The passage argues that because the banks do not need to be responsible its customer's deposits, it therefore does not care if it is secure or not. A failure would just mean closing down the bank, and not incurring any lawsuits from its customers to get their money back.
However, choice B debunks that myth. It says when the government did not insure dposits, the banks are failing possibly because their customers are all afreaid of losing money, and so less deposits are made. This will reduce the amount of cash the bank has holding that can be diverted for calculated investments to generate revenue etc...