Question

Which is not an important function of an FI’s capital? A) Protection against the risk of...

Which is not an important function of an FI’s capital?

A) Protection against the risk of insolvency.

B) Provide confidence to uninsured creditors that the FI can withstand reasonable shocks to the value of their assets.

C) Protects the industry from larger insurance premiums.

D) All of the above

E) None of the above

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Answer #1

All of the above are an important functions of FI capital. Capital serves as a primary cushion against operating losses and unexpected losses in the value of assets. FI needs to hold enough capital to provide confidence to uninsured creditors that they can withstand reasonable shocks to the value of their assets. FDIC which guarantees deposits, is concerned that suffiecient capital is held so that their funds are protected. This protect also includes the protection of FI owners against increases in insurance premium. So option D is correct.

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