Question

True, false, or uncertain: Deposit insurance always and everywhere prevents financial crises

Short answer

This statement is False. Deposit insurance is an excellent way to control bank terror, but these events are just one possible reason for a financial crisis.

Step-by-step solution

Concept Introduction

A deposit is an amount that the depositor makes to the banks. It is a kind of loan which the depositor makes to the bank and against which the bank pays the interest. This same amount bank lends to the lenders and demand higher interest. The banks also take other risk-taking activities.

Explanation

In addition, deposit insurance may be portrayed as intended to prevent bank runs, but it is highly effective as a means of generating interest from risk-taking activities without the risk of adverse consequences.

They hold bank deposits because they want liquidity, that is, instant access to their funds during a bank run, rather than holding shares or bonds.

Final Answer

In this way, deposit insurance is not a method of instant access. Rather, it is a way for bank depositors to be paid back in due course. It is therefore inaccurate to refer to deposit insurance as instant access.