Deposit Insurance Finance Question help

Posted on 2013-11-25 16:27:00 in Finance by BIANCA

Assets: L+E

Cash $5 Insured Deposits 30

Loans $40 Uninsured Deposits 10

Tot A $45 Equity 5

Tot L+E 45



The bank experiences a run on its deposits after it declares it will write off 10 million of its loans as a result of non-payment.

The bank has the option of meeting the withdrawals by first drawing down its cash and then by selling off its loans. A fire sale of loans in one day can be accomplished at a 10% discount. They can be sold at a %5 discount if sold in two days. The full market value will be obtained if they are sold after two days



A) What is the amount of loss to the insured depositors if a run on the bank occurs on the first day, how about the second?

B) What amount do the uninsured depositors lose if the FDIC uses the insured depositor transfer method to close the bank immediately? The assets will be sold after the two-day period.

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