Exam 19: Deposit Insurance and Other Liability Guarantees

The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.

The risk of moral hazard increases when capital levels are low.

What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs?

Currently in Canada, deposit insurance premiums increase with the amount of risk of the institution.

A run on a bank is not necessarily a bad occurrence.

The following market value balance sheet of a failed bank ($ millions) If the insured depositor transfer resolution method is utilized, what is the cost to insured depositors of bank failure resolution?

Under the option pricing model of deposit insurance, the cost of the insurance

Critics of deposit insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks.

The provision of deposit insurance by CDIC is similar to having the CDIC ________ on the assets of the bank that buys the deposit insurance.

The insured depositor transfer method of failure resolution

Which of the following refers to the regulators' policy of allowing an FI to continue operating even when its capital funds are fully depleted?

Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process.

Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain.

One of the overall objectives in using subordinated debt in addition to common stock for a DTI's capital base is to improve market discipline of a DTI's risk structure.

The use of subordinated debt as a replacement for common stock has been proposed as a method of increasing stockholder discipline.

As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million. What is the cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million. What is the cost to the CDIC if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

Moral hazard encourages the FI to take on more, rather than less, risk.

How can the regulators reduce the effects of moral hazard in the absence of depositor discipline?

Insured depositors can be covered for more than $100,000 at any given FI under current CDIC regulations.