The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

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BlackTom AI · Accepted Answer

To tackle this question, start by focusing on what each method entails in the context of resolving failed banks.
Option A: 'that the FDIC guarantees all deposits when it uses the payoff method.' A payoff typically involves paying off insured deposits and liquidating the bank, but it does not involve guaranteeing all deposits in the sense of preserving the failed bank’s original balance sheet through an outside buyer. This option overstates the guarantee aspect for the payoff method, making it inaccurate.
Option B: 'that the FDIC guarantees all deposits when it uses the purchase and assumption method.' In a purchase and assumption (P&A) transaction, another institution purchases some or all of the failed bank’s deposits and assets, and the FDIC covers any remaining shortfall or guarantees deposits up to the insured limit. This description aligns with the standard understanding of P&A, where guarantees or protections are more comprehensive compared to a simple payoff, making this option a strong candidate for the correct description.
Option C: 'that the FDIC is more likely to use the payoff method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.' In practice, the FDIC tends to use the P&A method for larger institutions to maintain stability and protect the banking system, whereas a payoff is more common for smaller banks or when a quick resolution is preferred. This statement contradicts typical policy tendencies, thus it is incorrect.
Option D: 'that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions.' The feasibility of a P&A depends on finding a willing buyer, which can be challenging for small institutions if there is limited market demand, and large institutions are not categorically more or less likely to be purchased. This option oversimplifies and misstates the practical considerations, so it is not accurate.
In summary, option A misstates the guarantees involved in payoff, option C mischaracterizes the typical use of payoff versus P&A for large banks, and option D makes an oversimplified claim about purchase feasibility by size. The description in option B best captures the distinction: P&A involves guaranteeing or ensuring deposits through a sale to another bank, whereas payoff does not provide the same level of deposit protection through a purchaser. This aligns with the fundamental difference between the two methods in resolving failed banks.

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

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The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is

View Explanation

Log in for full answers

Similar Questions

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Which of the following outcomes is most directly attributable to the absence of a fully mutualised European Deposit Insurance Scheme (EDIS)?

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What is the drawback of deposit insurance facility?

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More Practical Tools for Students Powered by AI Study Helper

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