Features of Banking And Non-Banking Financial Institutions - SS1 Economics Past Questions and Answers - page 1

Banking institutions are federally insured by the government for several key reasons: * **To protect depositors:** Federal deposit insurance, such as that provided by the Federal Deposit Insurance Corporation (FDIC) in the United States, guarantees that depositors will receive their money back, up to a certain limit, even if the bank fails. This protects individuals and businesses from losing their savings. * **To prevent bank runs:** Without deposit insurance, a rumor about a bank's financial instability could trigger a "bank run," where many depositors withdraw their money simultaneously. This can quickly lead to a bank's collapse, even if the bank was initially solvent. Insurance helps maintain confidence in the banking system. * **To maintain financial stability:** The failure of one bank can have a ripple effect, potentially leading to the failure of