Question

Consider a failing bank. How much is a deposit of $290,000 worth to the depositor . if the FDIC uses the payoff method? The purchase-and-assumption method? Which method is more costly to taxpayers?

Short answer

Under the payoff method, the FDIC guarantees the first $250,000 kept with a bank, if there should arise an occurrence of the bank comes up short. . Hence, in this condition, the depositor will get $250,000 immediately, once the bank is announced insolvent. While for the rest of $100,000, he will have to wait for the fulfillment of the solvency process. In the second method of the FDIC, arranges for taking over of this failing bank, so that depositors do not lose any money. The FDIC ingrains capital in the bankrupt institution to make it viable and will arrange for a willing partner, who can take over the failing bank. This way, a single penny of the depositors is not lost.

Step-by-step solution

Concept Introduction

In a purchase and assumption transaction, the FDIC arranges the sale of a troubled or insolvent financial institution to a healthy one.

Explanation

The FDIC guarantees the contributors the security of their funds in a bank against the blow of that bank. It ensures a specific aggregate, which will be paid, in the event of banks fizzling. The FDIC utilizes two methods to protect the investors. One is the payoff method and the other is the purchase and assumption method.

Explanation

Under the payoff method, the FDIC promises the first $250,000 deposited with a bank, in case of bank fails. For the cash over this roof, the donor needs to sit tight for the fulfillment of the dissolvability interaction and conversion of a resource into money to get back the remainder of the sum.

Hence, in this condition, the depositor will get $250,000 instantly, once the bank is declared insolvent. While for the rest of $100,000, he will have to wait for the fulfillment of the solvency process.

Final Answer

In the second method of the FDIC, that is, the purchase and assumption method, the FDIC arranges for variation over of this failing bank, so that depositors do not lose any money. The FDIC implants capital in the bankrupt establishment to make it reasonable and will sort out for a willing accomplice, who can assume control over the weak bank. Thusly, a solitary penny of the contributors isn't lost.

However, this exercise is costly for the FDIC. As the FDIC has to infuse capital, once the bank is declared insolvent. The FDIC will additionally make the proposition practical by giving financed advances or retaining a few powerless credits. This causes an additional weight on the citizens.