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As long as savings deposits are insured by the government, depositors

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Bunuel
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As long as savings deposits are insured by the government, depositors [#permalink] New post   03 Aug 2019, 23:33
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58% (01:39) correct 43% (01:48) wrong based on 1200 sessions
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Which of the following best completes the passage below?

As long as savings deposits are insured by the government, depositors will have no incentive to evaluate the financial strength of a savings bank. Yield alone will influence their choice of bank. To attract deposits, banks will be forced to offer the highest possible interest rates. And since paying higher rates inevitably strains the financial strength of a bank, ______

(A) the government will be forced o impose limitations on interest rates
(B) deposit insurance will ultimately lead to the financial weakening of many banks
(C) savers will be forced to choose between deposit insurance and higher interest rates
(D) deposits will tend to go to the banks with the greatest financial strength
(E) bank profits will tend to rise to ever-higher levels
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B
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mbain21
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   01 Dec 2019, 02:28
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This is “Must be True” question
Question stem :
Fact 1 - Since deposits are protected, evaluation of financial strength of bank turns out to be a difficult task.
Fact 2 - Choice of bank is driven by yield or interest rate they offer.
Fact 3 - So to attract more deposits banks will offer higher rate of interest

The decision of bank offering a higher rate of interest is driven by the fact that the deposits are protected by the government. So if the banks keep on offering higher rate of interest it would end up eroding banks financial strength.

So option B.

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duchuyftu2
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   20 Dec 2019, 06:37
Bunuel wrote:
Which of the following best completes the passage below?

As long as savings deposits are insured by the government, depositors will have no incentive to evaluate the financial strength of a savings bank. Yield alone will influence their choice of bank. To attract deposits, banks will be forced to offer the highest possible interest rates. And since paying higher rates inevitably strains the financial strength of a bank, ______

(A) the government will be forced o impose limitations on interest rates
(B) deposit insurance will ultimately lead to the financial weakening of many banks
(C) savers will be forced to choose between deposit insurance and higher interest rates
(D) deposits will tend to go to the banks with the greatest financial strength
(E) bank profits will tend to rise to ever-higher levels


To attract deposits, banks will be forced to offer the highest possible interest rates. And since paying higher rates inevitably strains the financial strength of a bank, ______

-> the scope is about the banks's plan to attract depositors by offering high interest rate
-> C,D,E are easily eliminated because they do not talk about the banks' plan

Between A and B, I went for B because it talks about "the financial weakening of many banks", which is related to the the premise "strains the financial strength of a bank"

Can anyone help me out with why A is wrong?
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   25 Jan 2020, 01:18
Bunuel wrote:
Which of the following best completes the passage below?

As long as savings deposits are insured by the government, depositors will have no incentive to evaluate the financial strength of a savings bank. Yield alone will influence their choice of bank. To attract deposits, banks will be forced to offer the highest possible interest rates. And since paying higher rates inevitably strains the financial strength of a bank, ______

(A) the government will be forced o impose limitations on interest rates
(B) deposit insurance will ultimately lead to the financial weakening of many banks
(C) savers will be forced to choose between deposit insurance and higher interest rates
(D) deposits will tend to go to the banks with the greatest financial strength
(E) bank profits will tend to rise to ever-higher levels


D) is a near answer, a trap, as i see it.
D) is probably true, however, only WHEN financial strength would correlate with higher rates. Then the banks with the greatest financial strength would be able to offer better rates. But this is not explicitly mentioned or implied!
Also, D) has a limited scope and does not fit as nicely in the line of reasoning as C).
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   26 Jan 2020, 03:28
maybe A is wrong because it introduces new info. that is the gov should impose limitations.

introducing new information is not allowed in infer questions.
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   20 Mar 2021, 22:47
Hello Expert

In the stated question, the correct option is B which is merely the restatement of the last line of the question stem.
"....Strains the financial strength of the bank, ...financial weakening of many banks"

Can you please explain in a little more detail justifying the option choice? It would really be very helpful.

My answer choice was D or A in that sequence. With the strain on the financial strength of the bank, the bank with the greatest financial strength will tend to push out more interest rates "to attract people" because "yield alone will influence" their choice of bank.
Consequently, the government will be forced to impose limitations on interest rates (option A)
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   05 Apr 2021, 01:51
The only thing that influences savers is the yield, since govt insures the savings. Higher yield strains financial strength leading to weakening the bank's financial strength. So B is the answer
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   05 Apr 2021, 04:05
I am continuously finding difficulties in answering such " complete the passage questions". I am pretty sure that i am doing something fundamentally wrong . Can someone please explain me how to approach such questions and what are some Do's and Dont's of these kind of questions. Bunuel GMATNinja
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   18 May 2021, 23:39
mbain21 wrote:
This is “Must be True” question
Question stem :
Fact 1 - Since deposits are protected, evaluation of financial strength of bank turns out to be a difficult task.
Fact 2 - Choice of bank is driven by yield or interest rate they offer.
Fact 3 - So to attract more deposits banks will offer higher rate of interest

The decision of bank offering a higher rate of interest is driven by the fact that the deposits are protected by the government. So if the banks keep on offering higher rate of interest it would end up eroding banks financial strength.

So option B.

Posted from my mobile device


Hi,
My thinking is deposits are protected by the Government and not the bank. If the banks offer higher interest rates, it will likely weaken the financial strength of the Government since they are responsible for the payback of the deposits. In that case, they will limit the rates to protect themselves.
Could you please help me understand the flaw in my thinking.
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   03 Nov 2022, 01:51
According to me, the answer was D.

Reasoning-
We are told that yield alone will influence the choice of bank. The higher the interest more the depositors. and if interest rates are higher, it will strain the financial strength of the bank. So, if banks are financially strong from the start, people will choose those banks as they provide higher interest rates. And since paying higher rates will strain the bank, it will ultimately lead to banks being financially weak.

So the two options I was confused between were B and D. I chose D as it will be the immediate cause, while B will be caused way ahead in the future.

Please let me know where I went wrong.
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   28 Dec 2022, 06:30
Bunuel wrote:
Which of the following best completes the passage below?

As long as savings deposits are insured by the government, depositors will have no incentive to evaluate the financial strength of a savings bank. Yield alone will influence their choice of bank. To attract deposits, banks will be forced to offer the highest possible interest rates. And since paying higher rates inevitably strains the financial strength of a bank, ______

(A) the government will be forced o impose limitations on interest rates
(B) deposit insurance will ultimately lead to the financial weakening of many banks
(C) savers will be forced to choose between deposit insurance and higher interest rates
(D) deposits will tend to go to the banks with the greatest financial strength
(E) bank profits will tend to rise to ever-higher levels


What's wrong with Option C

Option C states, since offering HIGHER interest rates strains the financial strength of Bank, it forces savers to choose between deposit insurance and higher interest rates

Can anyone explain?
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simran01
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   28 Dec 2022, 12:29
But isn't B redundant, since its repeating, what's mentioned in the other half that "paying higher rates inevitably strains the financial strength of a bank". financial weakening of the bank one and the same thing.
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Re: As long as savings deposits are insured by the government, depositors [#permalink] New post   30 Dec 2023, 03:13
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