Certified Financial Management Specialist Practice Exam

What is the primary purpose of the Federal Deposit Insurance Corporation (FDIC)?

1. Insuring bank investments

2. Protecting bank deposits up to a certain limit

3. Regulating stock market transactions

4. Offering loans to businesses

The correct answer is: Protecting bank deposits up to a certain limit

The primary purpose of the Federal Deposit Insurance Corporation (FDIC) is to protect bank deposits up to a certain limit. Established in 1933, the FDIC was created in response to the widespread bank failures of the Great Depression, with the goal of restoring public confidence in the banking system. It insures deposits at member banks, which means if a bank fails, the FDIC will reimburse depositors for their insured deposits, typically up to $250,000 per depositor, per insured bank, for each account ownership category. This insurance provides a safety net for depositors, effectively safeguarding their money and promoting stability within the financial system. The existence of the FDIC helps prevent bank runs, where large numbers of customers withdraw their deposits fearing insolvency, as customers have assurance that their deposits are protected. Other options suggest functions that fall outside the FDIC's mandate; the FDIC does not insure bank investments, regulate stock market transactions, or offer loans to businesses. Instead, its focus is solely on protecting depositors and ensuring the safety and soundness of member banks.