Final answer:
Collateral must be set aside for trust account deposits over FDIC insurance limits to protect depositors. FDIC insures individual depositors up to $250,000, necessitating additional collateral for larger sums to ensure depositor's money safety.
Step-by-step explanation:
When cash of trust accounts is deposited in a bank, the bank must ensure these funds are secured and that depositor funds are protected. If the bank owns the trust accounts in question, there is a need to properly manage the funds, including ensuring enough collateral is set aside. The correct answer to the student's question is that collateral must be set aside for amounts over FDIC limits. The Federal Deposit Insurance Corporation (FDIC) insures each depositor up to $250,000, which means that for any deposits over this amount, the bank needs to collateralize the additional amount to ensure the safety of the depositor's money in the event the bank faces financial difficulties.
Furthermore, monetary transactions and savings in a bank offer a high degree of liquidity and security, partly due to the protections offered by the FDIC, which guarantees depositor's assets within the insured limits. Banks view deposits as liabilities, ensuring they have sufficient assets or reserves on hand, sometimes even beyond the reserve requirements set by the Federal Reserve, to meet their obligations to their customers.