Question

1. What are some of the causes for the banking crisis that began in 2008? 2. What is the role of the FDIC? 3. How does a debit card differ from a credit card?

Answer 1

Causes for the banking crisis:

The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. They created interest-only loans that became affordable to subprime borrowers.

In 2004, the Federal Reserve raised the fed funds rate just as the interest rates on these new mortgages reset. Housing prices started falling as supply outpaced demand. That trapped homeowners who couldn't afford the payments, but couldn't sell their house. When the values of the derivatives crumbled, banks stopped lending to each other. That created the financial crisis that led to the Great Recession.

Role of FDIC:

The Federal Deposit Insurance Corporation, or FDIC, is an independent United States agency that examines financial institutions and insures much of the money individuals deposit with them. The FDIC helps protect insured deposits when an FDIC-insured financial institution fails and has helped restore stability of the banking system twice in the past 35 years.

How does the FDIC work:

The FDIC promotes confidence in the banking system by insuring deposits in financial institutions and then monitoring those financial institutions to ensure their behavior isn’t too risky. If an FDIC-insured institution fails, then the FDIC steps in to protect insured funds.

When a failure occurs, the FDIC takes one of two steps. The first option is to set up the insured accounts with a new bank or thrift in the same amount that was insured at the failed bank. For the second option, the FDIC will issue the depositor a check for the insured amount to reimburse the depositor directly, up to a limit of $250,000 per covered account.

The account holder should receive the new account or payment covering the insured accounts within a few days after the financial institution closes, usually the next business day. But if the account’s balance is more than the insured amount of $250,000 or the account holder otherwise has uninsured funds, then the account holder may receive some portion of the uninsured funds if the FDIC finds a buyer for the bank’s assets.

Unfortunately, it can take several years to sell the assets of a failed bank, and there’s no guarantee of how much a depositor will receive after the fact. If you have more than $250,000 with a single FDIC-insured bank, a way to help guard against losing part of your money during a bank failure is to hold no more than $250,000 in any single insured account category. Take a look at the FDIC account category tool for a breakdown of covered categories.

Banks and thrifts are required to pay risk-based insurance premiums to the FDIC and the FDIC commonly conducts examinations of banks and thrifts. The monitoring that these banks undergo makes it more difficult to engage in risky behavior, which means fewer banks fail while under FDIC protection.

Difference b/w debit card & credit card:

Have you ever been confused about the difference between a credit and debit card? It’s easy to see why. Debit cards and credit cards are accepted at many of the same places. They also both offer convenience and eliminate the need to carry cash. They even look similar.

The fundamental difference between a debit card and a credit card account is where the cards pull the money. A debit card takes it from your banking account and a credit card charges it to your line of credit.

What Is a Debit Card:

Debit cards offer the convenience of a credit card but work in a different way. Debit cards draw money directly from your checking account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank and it is transferred to the merchant's account. It can take a few days for this to happen, and the hold may drop off before the transaction goes through.

You will have a PIN to use with your debit card at stores or ATM's. However, you can also use your debit card without a PIN at most merchants. You will just sign the receipt like you would with a credit card. Below are some other facts regarding debit cards.

• A debit card is tied directly to your checking account.
• It can be used where a credit card can be used.
• Generally, you will use your PIN to complete the transactions.

What Is a Credit Card:

A credit card is a card that allows you to borrow money against a line of credit, otherwise known as the card’s credit limit. You use the card to make basic transactions, which are then reflected on your bill.

Worth noting: you are charged interest on your purchases, though there is no interest charged if you do not carry your balance over from month to month. Credit cards have high interest rates, and your credit card balance and payment history can affect your credit score. Below are other facts about credit cards:

• A credit card is a line of credit you can access with your card.
• Generally, you must sign on these purchases (exceptions may be at the gas pump or for small amounts at a drive-through window).
• You will pay interest on the purchases made if not paid off in 30 days.