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Which criticism is made of deposit insurance?
ABanks take more risk, treating it as a safety net
BDepositors shift their savings into cash at home
CBanks refuse deposits above the insured ceiling
DInterest rates on insured deposits fall to zero
Answer & Solution
Correct answer: A. Banks take more risk, treating it as a safety net
1. Deposit insurance protects depositors from loss when an institution fails.
2. Some experts argue that this protection changes how certain banks behave.
3. Knowing their depositors have a safety net, those banks take too much risk.
4. Many believe this behaviour contributed to earlier bank failures.
5. So the criticism is aimed at the bank, not at the depositor, which is what makes it a hard item.
6. Insurance makes depositors more willing to leave money in a bank, so a flight to cash at home is the opposite of what happens.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.4 Insuring Bank Deposits_
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