Question

Which statement is false? (I.O6) a) \(\Lambda\) bout 99 percent of all banks are members of the FDIC. b) If the FDIC runs out of money, the federal government will supply it with more funds. c) The FDIC would rather have another bank take over an ailing institution than be forced to pay off its depositors. d) None of these statements is false.

Short answer

Since all the given statements (a), (b), and (c) are true, the exercise has an inconsistency in the question. Technically, the false statement is d) None of these statements is false, because all other statements are true.

Step-by-step solution

Analyze Statement (a)

Statement (a) says that "about 99 percent of all banks are members of the FDIC." The FDIC is an important entity that provides insurance to depositors in banks and helps maintain stability in the financial system. Since almost all banks in the United States are required to be members of the FDIC, this statement is likely to be true.

Analyze Statement (b)

Statement (b) says that "if the FDIC runs out of money, the federal government will supply it with more funds." The FDIC is an independent agency of the United States government, and in the case it runs out of funds, the federal government has the authority to step in and supply the necessary funds to keep it operational. Therefore, this statement is also true.

Analyze Statement (c)

Statement (c) states that "the FDIC would rather have another bank take over an ailing institution than be forced to pay off its depositors." The FDIC's main goal is to protect depositors and maintain stability in the financial system. If a bank is failing, it is usually more cost-effective and less disruptive to the financial system for another bank to take over the failing bank, rather than the FDIC having to pay off depositors using its funds. This statement is true as well.

Analyze Statement (d)

Statement (d) says that "none of these statements is false." Based on our analysis of statements (a), (b), and (c), we have determined that all of them are true. Therefore, this statement is also true.

Identify the False Statement

Since all given statements (a), (b), (c), and (d) are true, the exercise appears to have an error or inconsistency as our task is to identify a false statement. The correct answer should be "None of these statements is false," as all statements are true. However, given the wording of the question, the answer "d) None of these statements is false" is technically the false statement.

Key concepts

FDIC Membership

The Federal Deposit Insurance Corporation (FDIC) serves as a fundamental pillar for ensuring the security of depositors' funds within the banking system in the United States.

FDIC membership is critical to a bank's operation, as it instills confidence among the public and guarantees the safety of individual deposits of up to $250,000 per account holder, per insured bank. This insurance plays a vital role in maintaining trust in the financial system, especially during times of economic uncertainty.

With about 99% of banks in FDIC membership, the coverage extends to a vast majority of depositors, ensuring that they can rest assured their money is protected. The membership also requires banks to adhere to specific regulations and undergo regular examinations to uphold financial standards and practices that prevent undue risks.

Federal Government Financial Support

The federal government's financial support to the FDIC is a strong indicator of its commitment to the stability of the nation’s financial infrastructure.

Although the FDIC is an independent agency, it is backed by the full faith and credit of the United States government, meaning in the unlikely event that the FDIC exhausts its funds, the government is obligated to step in and provide the necessary resources to protect depositors.

This assurance of federal support acts as a deterrent to panic, helping prevent bank runs, which could destabilize the financial system. The promise of government support provides a safety net that allows the FDIC to manage high-impact financial disturbances effectively.

Financial System Stability

The ultimate objective of the FDIC, beyond protecting depositors, is to ensure the overall stability of the financial system.

The FDIC works to prevent banking panics by reassuring depositors that their insured funds are secure, and by facilitating the smooth transition of assets and liabilities if a bank fails.

The preference of having another solvent bank take over a failing institution rather than liquidating the institution is a prime example of this commitment. It ensures that the transition is as seamless as possible, keeping the financial system robust and operational even in instances of individual bank distress.

This approach protects the depositors and other stakeholders and minimizes disruption to the economy, which could arise from the collapse of a financial institution. Therefore, the stability of the financial system is crucial for economic growth, and the FDIC's role in such scenarios is integral.