Part 1Suppose after a few mergers and acquisitions, a single bank holds 70% of all the deposits in the United States. Part 2Which of the following statements is likely to be true in the event of the failure of the bank? A. The failure of the bank will likely cause a financial catastrophe, prompting the FDIC to do everything to prevent the institution from going bankrupt. B. The failure of the bank will likely cause a negative economic growth of the country, prompting the FDIC to adopt a system of deposits to lower the chances of this failure. C. The failure of the bank will likely cause the bond prices to increase significantly, prompting the FDIC to recommend further acquisitions to maintain the country's balance of trade.

Question

Part 1Suppose after a few mergers and​ acquisitions, a single bank holds​ 70% of all the deposits in the United States. Part 2Which of the following statements is likely to be true in the event of the failure of the​ bank? A. The failure of the bank will likely cause a financial​ catastrophe, prompting the FDIC to do everything to prevent the institution from going bankrupt. B. The failure of the bank will likely cause a negative economic growth of the​ country, prompting the FDIC to adopt a system of deposits to lower the chances of this failure. C. The failure of the bank will likely cause the bond prices to increase​ significantly, prompting the FDIC to recommend further acquisitions to maintain the​ country's balance of trade.

BlackTom AI · Accepted Answer

The question presents a hypothetical scenario where a single bank holds a dominant share of deposits (70%). This setup raises concerns about systemic risk and the role of the FDIC in preventing a broad financial panic.
Option A: 'The failure of the bank will likely cause a financial catastrophe, prompting the FDIC to do everything to prevent the institution from going bankrupt.' This option aligns with the idea of systemic risk: if one bank holds most deposits, its failure could threaten the entire payment system and confidence in banks, prompting aggressive intervention by the FDIC or government-backed guarantees to contain the shock.
Option B: 'The failure of the bank will likely cause a negative economic growth of the country, prompting the FDIC to adopt a system of deposits to lower the chances of this failure.' While the failure could slow growth, the phrasing about the FDIC adopting a 'system of deposits' is vague and inaccurate in typical policy language. The FDIC insures deposits and oversees resolution, but it does not implement a broad new system of deposits to prevent failures as a direct policy measure. The causal chain here is dubious and not supported by standard banking policy mechanisms.
Option C: 'The failure of the bank will likely cause the bond prices to increase significantly, prompting the FDIC to recommend further acquisitions to maintain the country's balance of trade.' This option mixes concepts in an unlikely way. Bank failure can affect credit markets and bond prices, but increased bond prices are not a typical immediate or direct consequence requiring FDIC-driven acquisitions to affect balance of trade. The implication that the FDIC would recommend acquisitions to affect balance of trade is also inconsistent with the FDIC’s statutory objectives, which focus on deposit insurance, bank supervision, and orderly resolution rather than strategic international trade actions.
In evaluating the options, consider the central issue: systemic risk from a dominant depositor base, potential impacts on financial stability, and the FDIC’s mandate in depositor protection and bank resolution. Option A most closely reflects the plausible, policy-relevant response to a bank of this size threatening financial stability, whereas Options B and C rely on mischaracterized roles of the FDIC, ambiguous mechanisms, or unlikely causal chains. Each incorrect choice either misstates the FDIC’s tools, confuses policy aims, or connects outcomes to results that are not the FDIC’s typical leverage in crisis management.

Homework:Chapter 10 Homework

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