Unit 2: Banking Institutions

Answer: B — The correct answer is B because the bank is required to maintain 10% of its deposits in reserves, which is $10 million. Since the bank currently has $15 million in excess reserves, it can lend out up to $50 million without changing its current level of reserves, as this would reduce its excess reserves to $10 million, thus meeting the reserve requirement. Option A is incorrect because $5 million is less than the maximum amount the bank can lend. Option C is incorrect because $10 million is the required reserve amount, not the maximum amount the bank can lend. Option D is incorrect because $20 million is less than the maximum amount the bank can lend.

Answer: A — The FDIC provides deposit insurance coverage up to $250,000 per depositor per insured bank account. In this scenario, the depositor holds $350,000 in a single account, so only $250,000 is protected; the remaining $100,000 is uninsured and at risk. This is a foundational regulation designed to protect consumers from bank failures while maintaining market discipline. Option B reflects the misconception that FDIC insurance is unlimited—it is not, and coverage caps exist specifically to encourage depositors to diversify and incentivize prudent banking behavior. Option C confuses FDIC coverage with reserve requirements; reserves and insurance are separate regulatory tools with different purposes. Option D introduces a false time-based penalty that does not exist in FDIC rules; coverage limits are uniform regardless of account age. The correct answer tests understanding of a critical regulatory safeguard that defines the boundary between protected and unprotected consumer deposits.

Answer: C — The correct answer is C. The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance, which guarantees each depositor's accounts up to $250,000 per insured bank for each account ownership category. This is its primary function in a bank failure, ensuring stability and public confidence by making insured funds available quickly, typically the next business day. Distractor A is wrong because the FDIC does not guarantee repayment of uninsured amounts above the limit; it pays out only up to the insurance limit from the Deposit Insurance Fund. Distractor B confuses the FDIC with the Federal Reserve, which acts as a lender of last resort to solvent but illiquid banks, not failed ones. Distractor D incorrectly limits the FDIC's insurance to credit unions (which have separate NCUA insurance) and misstates its transfer process; the FDIC works with acquiring banks, which are typically other commercial banks, not specifically credit unions.

Answer: B — An investment bank is most likely to facilitate the company's process of issuing debt securities because they specialize in helping companies raise capital through various financial instruments, such as bonds. This is in contrast to commercial banks, which focus on taking deposits and making loans to individuals and businesses. Central banks, like the Federal Reserve, are responsible for monetary policy and do not typically involve themselves in the issuance of debt securities. Credit unions, on the other hand, are not-for-profit financial cooperatives that primarily serve their members' banking needs.

Answer: B — A credit union's primary purpose is to provide financial services to its members, such as checking and savings accounts, loans, and other financial products. Credit unions are not-for-profit cooperatives that are owned and controlled by their members, who are often individuals or organizations with a common bond. By pooling their deposits and assets, credit unions can offer more competitive rates and fees to their members. Option B is the correct answer because credit unions are known for offering low-cost financial services to their members. Options A, C, and D are incorrect because they do not accurately describe the primary purpose of a credit union.