How do deposit insurance and FDIC resolution processes promote banking stability?

• A. They encourage high-risk behavior by banks.
• B. They require all banks to invest in government securities.
• C. They protect depositors and provide orderly resolution to avoid panic-driven runs.
• D. They eliminate the need for capital requirements.

Answer: (C)

Deposit insurance and FDIC resolution promote banking stability by reducing the likelihood of panic and making failures manageable. When savers know their deposits are insured, they are less likely to rush to withdraw at signs of trouble, which helps prevent bank runs. If a bank does fail, the FDIC steps in as receiver and unfolds the failure in an orderly way—often by paying insured deposits and transferring other accounts to a sound institution or by a controlled wind-down—so the disruption stays contained and confidence in the system remains intact. Together, these mechanisms keep payments flowing and the financial system functioning smoothly during stress.

The other ideas miss the mark. Deposit insurance does not deliberately push banks toward risk-taking; in fact, supervision and capital rules are in place to curb moral hazard. Requiring all banks to invest only in government securities isn’t how these programs operate. And eliminating capital requirements would remove a critical buffer for losses, undermining stability rather than supporting it.