Topic 8 - Deposit Insurance Design and Implementation

Question 1

Moral Hazard

Answer 1

Banks can take on extra risk knowing they are insured

Question 2

Fixed Rate Deposit Insurance

Answer 2

Every bank charged the same, does not differentiate between risky and conservative baks

Question 3

Risk Based Deposit Insurance

Answer 3

Banks charged a premium based on their riskiness

Question 4

How to Increase Stockholder Discipline

Answer 4

• Risk based deposit insurance
• Increased capital requirements
• Stricter closure rules

Question 5

How to Increase Regulator Discipline

Answer 5

• Examinations/independent audits

- Capital forbearance (prompt corrective action zones)

Question 6

How to Increase Depositor Discipline

Answer 6

• Brokers can be hired to distribute money across different banks
• Ration the amount of deposits they are willing to hold in risky banks
• Require higher interest rate/risk premiums on deposits

Question 7

Least Cost Resolution Strategy

Answer 7

Pass more of failure resolution costs onto uninsured depositors

Evaluate each failure resolution based on PV

Question 8

Insured Depositor Transfer Strategy

Answer 8

Uninsured depositors lose portion of deposits

Question 9

Financial Claims Scheme (FCS)

Answer 9

Cap of $250k guaranteed per account holder per bank

Question 10

Discount Window

Answer 10

Feds act as lender of last resort to support banks needing short term liquidity

Banks must have high quality asset collateral

Offers primary credit, secondary credit and seasonal credit