Question

Identify each statement as either true or false.

- In the United States, banks keep the entire value of all customer deposits in the bank vault to meet customer withdrawals.
- Banks typically loan out a portion of customer deposits.
- Bank runs occur when many customers attempt to withdraw deposits from a bank at the same time and the bank is unable to pay all customer withdrawals.
- The Federal Deposit Insurance Corporation (FDIC) protects bank depositors from bank failure.
- The fractional reserve banking system requires all banks to keep the total value of customer deposits in their vaults to prevent bank runs.

Answer 1

- False. Banks practice fractional reserve banking in the United States. Under the system, only a small portion of the customers deposits is held back to meet customer withdrawals. (The deposits are given as the loan)

- True. Banks earn profit by loaning out a large portion of customer deposits and collecting interest on these loans. (The deposit portion excluding the reserves are given as loans)

- True. Bank runs occur when many customers try to withdraw money from a bank at the same time and the bank is unable to meet all customer requests. The bank cannot honor all of the requests because it has loaned out of portion of the customers deposits. (The bank runs is a situation where all the depositors take out money from the banks)

- True. The FDIC insurance customer deposits to prevent bank runs and instill customer confidence in the banking industry. (It will protect depositors from bank failure)

- False. The fractional reserve banking system requires that only a portion of customer deposits is held back to meet withdrawals. (It is a fraction of deposits)