Exam 19: Deposit Insurance and Other Liability Guarantees

The Pension Benefit Guaranty Corporation (PBGC)insures pension benefits against the under-funding of pension plans by corporations.

The improved financial health of the FDIC during the 1990s resulted in a considerable reduction in deposit insurance premiums.

Interest rates charged to healthy banks that use the Federal Reserve discount window are typically set one percent below the fed funds target interest rate.

Because deposit insurance premiums were not priced in an actuarially fair manner during the period from 1933-1980s,instability was created in the credit and monetary system.

The provision of deposit insurance is similar to the FDIC selling a call option on the assets of a bank allowing the FDIC to exercise the option and seize the bank's assets if the bank becomes insolvent.

The Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA)required the FDIC to establish risk-based premiums for deposit insurance coverage at banks.

More than 90 percent of all insured DIs did not pay deposit insurance premiums in the late 1990s and early 2000s.

The risk of moral hazard decreases when capital levels are low.