Question

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.
A. payoff; large
B. purchase and assumption; no
C. purchase and assumption; large
D. payoff; no

Answer 1

If the FDIC decides that a bank is too big to fail, it will use the method purchase and assumption, effectively ensuring that no depositors will suffer losses.

Option B

Explanation:

The process by which a healthier bank purchases the assets and assumes the liabilities from a failing or unhealthier bank is known as purchase and assumption method. The liabilities includes all the deposits that are insured. This is the most preferred method to deal with the banks that are failing and is used by the Federal Deposit Insurance Corporation (FDIC).

FDIC provides deposit insurance to the depositors in saving institutions or commercial banks in US. The 1933 Banking Act which was enacted using the Great Depression created the FDIC to re-establish the trust in the banking system of America.

By the purchase and assumption method even if any banks fails, the depositors in that bank will not get affected and they will get paid by the bank that purchases the assets and assumes the liabilities from the failing bank.