Deposit Insurance And Other | Test Bank + Answers Ch.20

Chapter 20 Deposit Insurance and Other Liability Guarantees

KEY

1. Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy. 

2. A run on a bank is not necessarily a bad occurrence. 

3. The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings. 

4. The Federal safety net to protect the integrity of the payments system consists of deposit insurance and social welfare. 

5. The number of bank failures in the period of 1933-79 was less than the number of failures from 1980-1989. 

6. The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79. 

7. During the financial crisis of 2008-2009, deposit balances at DIs increased. 

8. Since its inception, the FDIC deposit insurance fund has never fallen to a negative balance. 

9. After nearly failing, the FDIC's Bank Insurance Fund (BIF) achieved record levels of reserves during the 1990s. 

10. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) restructured the savings association deposit insurance fund and transferred its management to the FDIC. 

11. As a result of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry. 

12. A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest rates in 1979-82 that created extensive duration mismatches of assets and liabilities in the savings and loan industry. 

13. A major reason for the deterioration of the deposit insurance funds in the 1980s was the downturn in the technology, manufacturing, and real estate industries. 

14. Deposit insurance is often blamed for the deterioration in depositor discipline that allowed FIs to accept more risk in the asset selection process. 

15. Moral hazard encourages the FI to take less, rather than more, risk. 

16. The risk of moral hazard decreases when capital levels are low. 

17. If regulators provide more protection against bank runs, the incidence of moral hazard is likely to increase. 

18. Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks. 

19. Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain. 

20. Pricing insurance premiums in an actuarially fair manner involves assessing the risk-taking profile of the financial institution. 

21. Because deposit insurance premiums were not priced in an actuarially fair manner during the period from 1933-1980s, instability was created in the credit and monetary system. 

22. Currently in the U.S., deposit insurance premiums increase with the amount of risk of the institution. 

23. Pricing deposit insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce incentives to take risks. 

24. The provision of deposit insurance is similar to the FDIC selling a call option on the assets of a bank allowing the FDIC to exercise the option and seize the bank’s assets if the bank becomes insolvent. 

25. The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset size and level of leverage of the DI. 

26. The use of the option pricing model to determine the actuarially fair premium is difficult to apply in practice because the asset values and risks are difficult to determine. 

27. The cost of insolvency of an FI to the FDIC is offset in part by the deposit insurance premiums paid by the bank. 

28. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) required the FDIC to establish risk-based premiums for deposit insurance coverage at banks. 

29. The initial risk-based deposit insurance program implemented on January 1, 1993 was based on capital adequacy and supervisory judgments involving asset quality, loan underwriting standards and other operating risks. 

30. The improved financial health of the FDIC during the 1990s resulted in a considerable reduction in deposit insurance premiums. 

31. The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not pay deposit insurance premiums if this ratio was above 0.25 percent. 

32. More than 90 percent of all insured DIs did not pay deposit insurance premiums in the late 1990s and early 2000s. 

33. Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases. 

34. The regulatory practice of excessive capital forbearance is a method of reducing the short-run and long-run costs to deposit insurance funds. 

35. The policy of capital forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency. 

36. Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders. 

37. The prompt corrective action program of the FDIC Improvement Act allows a bank or thrift to be placed into receivership when the book value of capital to assets falls below 2 percent. 

38. The ability of the FDIC to place a bank into receivership even though the book value of capital remains positive is an attempt to institute increased stockholder discipline. 

39. The use of subordinated debt as a replacement for common stock has been proposed as a method of increasing stockholder discipline. 

40. One of the overall objectives in using subordinated debt in addition to common stock for a DI's capital base is to improve market discipline of a DI's risk structure. 

41. Critics of the current FDIC insurance programs often argue that only uninsured depositors have any incentive to discipline riskier banks. 

42. Insured depositors can be covered for much more than $250,000 at any given FI under current FDIC regulations. 

43. The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $250,000 at any given bank. 

44. Brokers who break up large deposits into smaller units at different banks to ensure full coverage by deposit insurance are referred to as deposit brokers.

45. During the 1980s, a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure. 

46. The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates. 

47. The current "too big to fail" policy doctrine relies on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance. 

48. The 1993 Depositor Protection legislation gives equal claim to the value of liquidated assets less the amount of insured deposits to foreign uninsured depositors, domestic uninsured depositors, and the FDIC. 

49. The insured depositor transfer method of least-cost bank failure resolution requires the FDIC to employ the method that imposes the highest amount of failure costs on uninsured depositors. 

50. FDICIA imposed additional regulatory discipline as a substitute for increased stockholder and depositor discipline. 

51. The introduction of prompt corrective action capital zones by FDICIA was an attempt to place greater decision-making power at the discretion of regulators rather than on objective, measurable rules. 

52. The discount window at the Federal Reserve is a suitable substitute for deposit insurance and a possible method of preventing bank runs. 

53. Interest rates charged to healthy banks that use the Federal Reserve discount window are typically set one percent below the fed funds target interest rate. 

54. By decreasing the use of the discount window as a source of funding for a DI, the Federal Reserve hopes to reduce volatility in the fed funds market. 

55. State guaranty funds for insurance companies are sponsored by state insurance regulators rather than by a federal agency such as the FDIC. 

56. The required contribution from surviving insurers to protect policyholders of failed insurance companies usually is on a pro rata amount based on the relative asset size of the surviving company. 

57. The FDIC deposit insurance program is also available to credit unions. 

58. The National Credit Union Administration (NCUA) is an independent federal agency that insures credit union deposits. 

59. The deposit insurance programs of the National Credit Union Administration (NCUA) is modeled after the programs offered by the FDIC. 

60. The Pension Benefit Guaranty Corporation (PBGC) insures pension benefits against the under-funding of pension plans by corporations. 

61. The deficit realized by the PBGC in 1992 was a result of risk-taking by fund administrators. 

62. Deposit insurance premiums or costs imposed on a DI through activity constraints rather than direct monetary charges describes implicit premiums. 

63. Insurance pricing based on the perceived risk of the insured is referring to actuarially fairly priced insurance. 

64. Under the OPM, the FDIC charges the insurer a premium to insure the insurer’s deposits and if the insurer does well and the market value of the insurer’s assets is greater than the depositis, the net worth is positive and can continue in this manner.

65. Banks that are viewed by regulators as being too big to be closed and liquidated without imposing a systemic risk to the banking and financial system are referred to is large and in charge banks. 

66. As if January 1, 1994, the FDIC now has to base premiums on which of the following?

A. different categories and concentrations of assets.

B. different categories and concentrations of liabilities-insured, uninsured, contingent, and noncontingent.

C. other factors that affect the probability of loss.

D. the deposit insurer’s revenue needs.

E. all of the above.

67. Which of the following is NOT a social welfare effect of bank runs? 

A. Discipline of incompetent managers.

B. Negatively affecting the payments function of DIs.

C. Reduced availability of credit.

D. Potential decrease in the money supply.

E. Inability to perform intergenerational wealth transfers.

68. All of the following are associated with contagious runs at DIs EXCEPT 

A. liability holders not distinguishing between good and bad FIs.

B. liability holders seeking to quickly turn their liabilities into cash or safe securities.

C. a contractionary effect on the supply of credit.

D. negative social welfare effects.

E. an expansionary effect on the regional money supply.

69. The contagion effect 

A. stems from the positive correlation in FI returns.

B. results when interest rate risk increases credit risk and liquidity risk exposures.

C. occurs when liquidity risk problems at bad banks damages well-run banks.

D. occurs when a computer virus infects the computerized electronics payments systems Fedwire and CHIPS.

E. is completely eliminated by government provided deposit insurance against bank runs.

70. What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs? 

A. It decreases the likelihood contagious runs.

B. It increases concerns about the asset quality of FI.

C. It increases concerns about solvency of an FI.

D. It provides incentives to liability holders to engage in bank runs.

E. It provides preference to those who are first in line to withdraw funds over those last in line.

71. What was the objective of the FDIC Improvement Act (FDICIA) of 1991? 

A. Returning the banking industry to record profit levels.

B. Restructure the savings association deposit insurance fund and transfer its management to FDIC.

C. To deny deposit insurance coverage to funds obtained through deposit brokers.

D. To restructure the bank deposit insurance fund and prevent its potential insolvency.

E. To enforce the capital standards on insured depository institutions.

72. Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds? 

A. An increase in interest rate volatility.

B. Enhanced investment powers granted to thrifts.

C. Fraudulent behavior induced by the greed of the decade of the 80s.

D. Fraudulent behavior induced by ineffective regulatory incentives.

E. The extension of deposit insurance to uninsured depositors.

73. To address the decreasing balance of the FDIC deposit insurance fund during the financial crisis of 2007-2008 

A. deposit insurance programs were suspended for a period of three months.

B. the FDIC increased individual depositor insurance coverage from $100,000 to $250,000.

C. the FDIC announced that it would no longer honor deposit insurance coverage of some failing DIs.

D. two special assessments were levied on institutions participating in the FDIC insurance programs.

E. the U.S. Treasury had to take over management of the FDIC.

74. Which of the following methods was NOT a method used to replenish the FDIC's deposit insurance reserve fund during the most recent financial crisis? 

A. A special assessment was imposed on participating FIs in early 2009.

B. Individual depositor insurance coverage was increased to $250,000.

C. Deposit insurance premiums were increased.

D. Participating institutions were required to pre-pay insurance premiums.

E. A special assessment was imposed on participating FIs during the fall of 2009.

75. From January 2008 to December 2009, there were a total of ____ FDIC insured bank failures, which cost the FDIC approximately ____ billion to resolve. 

A. 26; $17

B. 140; $39

C. 166; $56

D. 211; $69

E. 234; $72

76. Moral hazard at FIs may 

A. result when actions and consequences are separated.

B. occur when interest rates are very high and volatile.

C. occur when commodity prices are very high and volatile.

D. be a consequence of strict regulatory supervision.

E. be a consequence of an erosion of family values.

77. How can the regulators reduce the effects of moral hazard in the absence of depositor discipline? 

A. By allowing DIs to undertake high-risk high-return asset investments.

B. By basing deposit insurance premiums on a DI's deposit size.

C. By charging explicit deposit insurance premiums and implicit premiums on DIs.

D. By exhibiting excessive capital forbearance.

E. By implementing prompt corrective action capital zones based on rules rather than discretion.

78. Which of the following refers to the regulators' policy of allowing an FI to continue operating even when its capital funds are fully depleted? 

A. Capital forbearance.

B. Prompt corrective action.

C. Risk-based deposit insurance.

D. Too-big-to-fail.

E. Regulatory oversight.

79. Which of the following refers to mandatory actions that have to be taken by regulators as a DI's capital ratio falls. 

A. Capital forbearance.

B. Prompt corrective action.

C. Risk-based deposit insurance.

D. Too-big-to-fail.

E. Regulatory oversight.

80. Bank risk taking can be controlled by increasing 

A. stockholder discipline by charging stockholders a surcharge.

B. stockholder discipline by setting risk-adjusted deposit insurance premiums.

C. depositor discipline by increasing the ceiling for deposit insurance coverage.

D. regulatory discipline by increasing the budgets of the regulatory agencies.

E. depositor discipline by expanding the doctrine of "too big to fail."

81. The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance. 

A. write a call option

B. buy a call option

C. write a put option

D. having a secondary lien

E. enter into a swap agreement

82. The insured depositor transfer method of failure resolution 

A. results in the closure of the failed bank.

B. results in the merger of the failed bank into a stronger entity.

C. keeps the failed bank operating for a short period of time.

D. minimizes the FDIC's out of pocket costs of resolving a failed DI.

E. forces insured depositors to bear some losses.

83. Subordinate debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution. Which of the following objectives is considered to be achievable when attempting to increase market discipline? 

A. Issuing SD might increase the size of the DI's capital cushion.

B. The expected cost of issuing SD should decrease as the risk of the DI increased.

C. Mandatory SD would reduce transparency at DIs.

D. SD would further emphasize the use of capital forbearance.

E. Secondary market yields on the SD would be inversely related to an increase in the risk of the DI.

84. What does a high proportion of brokered deposits indicate? 

A. Total risk-based capital ratio of the DI is less than 10 percent.

B. Above average risk, and thus an increased potential for failure.

C. Less informed savers are protected against a reduction in wealth.

D. Reduced insolvency risk as brokered deposits are covered under deposit insurance.

E. Lower levels of credit risk.

85. The system of flat deposit insurance premium formerly used in the U.S. 

A. enhances bank safety and soundness because it discourages bank risk taking.

B. reduces bank safety and soundness because it encourages bank risk taking.

C. has no impact on bank safety and soundness.

D. places banks that are considered "too big to fail" at a disadvantage.

E. provides unfair advantage to small community banks.

86. Which of the following is a drawback of charging flat deposit insurance premiums? 

A. The FDIC acts more like a private property-casualty insurer when charging flat premiums.

B. It discourages banks from taking risks.

C. Both high risk and low risk banks are charged the same premium rate.

D. High risk banks will be charged an unreasonably high premium rate.

E. Premiums reflect the expected private costs or losses to the insurer from the provision of deposit insurance.

87. When risk-taking is not actuarially fairly priced into deposit insurance premiums 

A. depositors are required to pay the shortfall in funds collected.

B. there is an increase in the incentives for owners of DIs to take additional risk.

C. deposit insurance premiums are more costly than economically justified.

D. depositors will be unprotected should the DI become insolvent and fail.

E. the insurance provider is forced to find other sources of funds to continue coverage for the institution.

88. The least cost resolution strategy of FDICIA requires failure resolution alternatives for all banks to be evaluated on a 

A. historical cost basis.

B. opportunity cost basis.

C. market value basis.

D. present value basis.

E. replacement cost basis.

89. How is the cost of a systemic risk exemption to the least-cost resolution of bank failures shared among banks? 

A. It is shared equally among all other insured banks.

B. Additional deposit insurance premiums are imposed on FIs based on their size as measured by their total deposits and borrowed funds excluding subordinated debt.

C. Additional deposit insurance premiums are imposed on FI based on their size as measured by their total deposits and borrowed funds including subordinated debt.

D. It is shared equally among all other insured banks based on the profits earned by the FI during the year.

E. The cost is borne by the bank whose run was responsible for the contagion.

90. Discount window loans from the Federal Reserve are used as 

A. Non-permanent short-term funds.

B. Funds to meet seasonal liquidity needs.

C. Funds to meet unexpected deposit drain.

D. Funds to meet reserve requirement.

E. All of the options.

91. Access to the discount window of the Federal Reserve is unlikely to deter bank runs because 

A. discount loans are meant to provide temporary liquidity for inherently solvent banks.

B. borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis.

C. a bank needs high-quality liquid assets to pledge as collateral.

D. discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time.

E. All of the options.

92. The federal safety net to minimize bank failures includes all of the following EXCEPT 

A. deposit insurance.

B. reserve requirements.

C. contagious runs.

D. minimum capital requirements.

E. the discount window of the Federal Reserve Bank.

93. The insolvency of the FSLIC occurred because of 

A. declining real estate values.

B. risky lending.

C. asset liability mismatch.

D. insider lending.

E. All of the options.

94. The FDICIA of 1991 strengthened the role of regulators to monitor bank asset quality by the following measures EXCEPT 

A. requiring improved accounting standards for banks.

B. giving private accountants an increased role in monitoring bank performances.

C. requiring an annual on-site examination by regulators.

D. requiring banks to work on achieving market value accounting.

E. disallowing independent audits.

95. Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA? 

A. Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates.

B. Place a bank or thrift into receivership as soon as its capital falls below some positive book value level.

C. Document the evaluation and the assumption on which it is based.

D. Retain documentation for at least five years.

E. Select the least costly alternative based on the evaluation.

96. During the 1980s, which of the following was NOT a change in the financial environment that had an inverse impact on U.S. banks and thrifts? 

A. The effects of significant interest rate changes.

B. The failure of the FSLIC.

C. The deterioration of real estate prices.

D. The collapse of the energy industry.

E. Significant deterioration in the agricultural economy.

97. Deposit insurance contracts can be structured to reduce moral hazard behavior by 

A. increasing depositor discipline.

B. increasing stockholder discipline.

C. increasing regulator discipline.

D. reducing owner incentives to take risks.

E. All of the options.

98. The FDIC establishes risk-based deposit insurance premiums by considering all of the following EXCEPT 

A. the deposit insurer's revenue needs.

B. different categories and concentrations of assets.

C. the frequency of examinations.

D. different categories and concentrations of liabilities.

E. other factors that affect the probability of loss.

99. Under the option pricing model of deposit insurance, the cost of the insurance 

A. decreases as the insured deposit base increases.

B. decreases as the period over which the insurance coverage extends is increased.

C. increases with the level of risk of the assets held by the DI increase.

D. decreases with market interest rates.

E. increase as the level of leverage used by the DI decreases.

100. Which of the following considerations was not imposed by FDICIA in an attempt to increase regulatory discipline? 

A. The act required improved accounting standards for banks.

B. The act forbids the use of brokered deposits.

C. The act required an annual on-site examination of every bank.

D. The act gave private accountants a greater role in monitoring a bank's performance.

E. The act produced prompt corrective action capital zones based on observable rules rather than discretion of examiners.

101. Which of the following is NOT a differentiation between deposit insurance and state guaranty funds for the insurance industry? 

A. The required contributions provided by surviving insurers differs widely across states.

B. The annual pro rata contributions often are legally capped for each insurer as a percent of premium income.

C. A permanent guaranty fund does not exist for the insurance industry.

D. Contributions by surviving firms into the guaranty fund occur before an insurance company has failed.

E. The programs that are sponsored by state insurance regulators are administered by private insurance companies.

102. The costs to the bank of borrowing at the discount window do NOT include 

A. an explicit rate of interest on the borrowings.

B. the market value of collateral to be pledged against the loans.

C. the negative signal the use of such borrowings sends to regulators about the insurer's financial condition.

D. the negative signal the use of such borrowings sends to the market about the bank's financial condition.

E. the possibility of greater regulatory scrutiny and examination.

103. The changes implemented by the Fed in January 2003 to its discount window lending 

A. decreased the cost of borrowing.

B. eased the terms of borrowing.

C. terms of borrowing became less flexible.

D. resulted in reduction of outstanding discount loan volumes.

E. None of the options.

104. Why are credit unions less affected by financial crises experienced by other thrifts such as savings associations? 

A. They hold almost 30 percent of their assets in government securities.

B. They hold relatively high amounts of residential mortgages.

C. Less than 10 percent of their assets are in small consumer loans.

D. They are more diversified than other DIs.

E. Their customers have no other options for their banking needs.

105. In the insurance industry, state guarantee funds have a number of important differences from deposit insurance. Which of the following is NOT one of these differences? 

A. No permanent guarantee fund exists for the insurance industry.

B. They’re run and administered by private insurance companies themselves.

C. In the event of a failure, the other insurers operating in the state are levied a fee based on the premium income derived within the state.

D. Small policy holders of the failed institution experience no delay when receiving the cash value of their policies.

E. Pro rata contributions by the surviving institutions are often capped at 2 percent of premium income.

106. Which the following statements about the Pension Benefit Guarantee Corporation (PBGC) is FALSE? 

A. The establishment of the PBGC insured pension benefits against the underfunding of plans by corporations.

B. Since its inception in 1974, the PBGC has never operated at a surplus.

C. The PBGC now operates on a risk-based premium plan where riskier (underfunded) pension plans pay higher premiums than less risky (fully funded) pension funds.

D. The PBGC has little regulatory power over the pension funds it insures.

E. The PBGC believes that although it currently has a deficit, it has sufficient funds because the obligations are paid over the beneficiary’s lifetimes.

107. The following table shows the market value balance sheet of a failed bank ($ millions):

  

What is the market value of capital? 

A. $200 million.

B. -$200 million.

C. $0.

D. $400 million.

E. $600 million.

Feedback: Assets - Liabilities = Equity
400 - (200 + 400) = −$200

108. The following table shows the market value balance sheet of a failed bank ($ millions):

  

If the insured depositor transfer resolution method is utilized, what is the cost to insured depositors of bank failure resolution? 

A. $0.

B. -$200 million.

C. $67 million.

D. $133 million.

E. $200 million.

Feedback: The insured depositors' accounts will be transferred to the acquiring bank with no loss in value.

109. The following table shows the market value balance sheet of a failed bank ($ millions):

  

If the insured depositor transfer resolution method is utilized, what is the cost to uninsured depositors of bank failure resolution? 

A. $0.

B. -$200 million.

C. $67 million.

D. $133 million.

E. $200 million.

Feedback: Uninsured depositors will make up for the negative equity position of the failed bank.
Therefore, they stand to take a 50% "haircut," or lose $200 million

110. The following table shows the market value balance sheet of a failed bank ($ millions):

  

If the insured depositor transfer resolution method is utilized, what is the cost to the FDIC of bank failure resolution? 

A. $0.

B. -$200 million.

C. $67 million.

D. $133 million.

E. $200 million.

Feedback: Since the FDIC is only interested in "small savers" with accounts less than $250,000, and those accounts are transferred to the acquiring bank, the insured deposit transfer method results in no payout or loss to the FDIC.

111. As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.

 

What is the current net worth (market value) of the bank? 

A. +$40 million.

B. $0 million.

C. -$40 million.

D. -$60 million.

E. -$100 million.

Feedback: Market value of loan is $240 million, which is $100 million less than book value.
Therefore, market value of equity is (40 - 100) = −$60

112. As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.

 

What is the cost to the insured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure? 

A. $0.

B. $100 million

C. $30 million.

D. $40 million.

E. $60 million.

Feedback: The insured depositors' accounts will be transferred to the acquiring bank with no loss in value.

113. As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.

 

What is the cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure? 

A. $0.

B. $20 million.

C. $30 million.

D. $40 million.

E. $60 million.

Feedback: The negative equity will be borne by the uninsured depositors.
Recall that stockholders have limited liability so they cannot be held responsible for the loss in market value of loan (or any asset) that leads to negative equity.

114. As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million.

 

What is the cost to the FDIC if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure? 

A. $0.

B. $20 million.

C. $30 million.

D. $40 million.

E. $60 million.

Feedback: Since the FDIC is only interested in "small savers" with accounts less than $250,000, and those accounts are transferred to the acquiring bank, the insured deposit transfer method results in no payout or loss to the FDIC.