Final answer:
Bank supervisors can require a bank with low or negative net worth to change its behavior and can force such a bank to close or be sold. This is part of bank regulation to ensure financial stability. Deposit insurance helps prevent bank runs by protecting depositors.
Step-by-step explanation:
If bank supervisors discover that a bank has a low or negative net worth, or is engaging in excessively risky lending practices, they indeed have the authority to mandate changes in the bank's operations. In severe situations, supervisors can also compel a problematic bank to close or arrange for its sale to a more financially healthy bank. These interventions are designed to maintain the stability and integrity of the financial system.
This process is part of comprehensive bank regulation and oversight, which includes agencies such as the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA) in the United States. These regulatory bodies supervise financial institutions to ensure their solvency and to protect depositors.
Rumors of a bank being at financial risk can cause a bank run, where depositors withdraw funds en masse, potentially leading to a downward spiral for the bank in question. Deposit insurance, such as that provided by the FDIC, safeguards depositors' funds to prevent such a panic, even if the bank has negative net worth.