Question

The primary purpose of deposit insurance is to

a) protect bank shareholders against losses.
b) improve the flow of information to investors.
c) prevent banking panics.
d) protect bank employees from unemployment.

Answer 1

The primary purpose of deposit insurance is to prevent banking panics by ensuring that depositors do not lose their money if a bank fails, which is managed by the FDIC in the United States.

Step-by-step explanation:

The Primary Purpose of Deposit Insurance

The primary purpose of deposit insurance is to prevent banking panics. This insurance system ensures that depositors in a bank will not lose their money if the bank goes bankrupt. In the United States, the Federal Deposit Insurance Corporation (FDIC) manages deposit insurance, guaranteeing bank deposits up to $250,000. This protection helps maintain confidence in the banking system and prevents bank runs, which can occur when depositors fear that a financial institution is at risk of failure. The FDIC charges banks an insurance premium, based on the bank’s deposits and the riskiness of its financial situation, to fund this insurance.