Question on: SS1 Economics - Features of Banking And Non-Banking Financial Institutions
Why are banking institutions federally insured by the government?
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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
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