MacroeconomicsLesson 2 of 5 in the course Monetary Policy and Bank Regulation

Bank Regulation, Supervision, and Protection Against Runs

5 flashcards · 4 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Bank regulation helps protect depositors and preserve the reliability of the financial system. This lesson introduces the main tools regulators use to limit excessive risk and keep banks financially sound.

A stable financial system allows people to access their deposits and enables businesses and households to make and receive payments. When important parts of the financial system fail, firms may be unable to obtain financing for ordinary operations, and people may have trouble using checks or debit cards. The 2008–2009 financial crisis made these risks visible.

All flashcards

What is bank capital?
A bank's net worth, calculated as its assets minus its liabilities.
Why do regulators require banks to maintain minimum capital?
It provides a cushion to absorb losses and helps protect depositors and other creditors.
What can bank supervisors do when they find serious problems?
They can require corrective action or, in extreme cases, force a bank to close or be sold.
What does FDIC deposit insurance do?
It protects eligible depositor funds up to the applicable coverage limit if an insured bank fails.
What is the Federal Reserve's lender-of-last-resort role?
It can lend to financial institutions that cannot obtain funding elsewhere.

Quiz questions

  1. When is a bank insolvent?Answer: When its liabilities exceed its assets.
  2. Which U.S. agency supervises credit unions?Answer: The National Credit Union Administration (NCUA).
  3. What is the Federal Reserve's role as lender of last resort?Answer: To lend to institutions that cannot obtain funding elsewhere.
  4. Why can political pressure weaken bank supervision?Answer: It may lead regulators to delay action, allowing losses to grow.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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