Source: http://business24-7.ae/articles/2009/4/pages/31032009/04012009_62c23946551f442db3c4d0beac4ea75c.aspx
Summary:
In the midst of recession, all parts of the world are facing financial problems. One of the financial problems is in the banking industry. This article explains that deposit insurance helps ease the flow of credit. In another words, many financial institutions has gotten deposit insurance to boost depositors’ confidence about the safety of their deposits. Many people who deposit their money to institutions are having second thoughts in depositing their money because some financial institutions closed down. Hence, depositors must be confident in depositing money to banks so they are able to lend out the deposits to people are in need to borrow money.
Connection:
The connection between this article and the textbook is deposit insurance. In the textbook, deposit insurance is defined as insurance on the deposit liabilities of chartered banks and other financial institutions. If a Canadian bank, trust company, and mortgage loan company becomes insolvent, the Canada Deposit Insurance Corporation would be able to return the principal with no interest back to the depositor. If a financial institution does not have deposit insurance, many depositors might not feel secure to deposit the money. Also, as banks invest or lend money that is deposited with them, a sudden withdrawals lead to high risk of bank runs. This would helped by deposit insurance.
Reflection
I believe this would help the banks in the current recession. If I was to deposit my lifetime money, I must be confident in the bank I deposit it into. Having deposit insurance would help infuse confidence. I believe it can help pervade investor’s confidence in this recession. This would help the banking and financial system. In a economic decline, people are more conscious about their money. They have to be assured that their money is safe to deposit the money. In addition I think it is a plus for banks to have deposit insurance since they can avoid bank runs.
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I agree that we all feel safer when there is deposit insurance. Not only is this good for the bank, but it is also good for the whole country. This is because the people feel more relaxed about leaving their money into the banks; thus, the banks have more money to invest in the country. As a result, this is a good strategy to get us out of the recession. Also, since we are in a recession, people would be even more worried about leaving their money in the bank because they may think that the economy is unstable and that would lead to their bank declaring bankruptcy. As a matter of fact, one reason why we are in recession was because of an United States bank declaring bankruptcy. People may think that it might happen again. Overall, this deposit insurance just reassures everyone that their money is safe.
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