Which of the following is a primary reason for bank regulation?

• A. To ensure banks only lend to government agencies
• B. To maximize bank profits
• C. To eliminate all competition among banks
• D. To protect depositors from bank failures

Answer: (D)

Verified step by step guidance

1. Understand the role of banks in the economy: Banks accept deposits from individuals and businesses and use these funds to provide loans and other financial services.
2. Recognize the risk involved in banking: Banks face the risk of insolvency if they make poor lending decisions or if there is a sudden withdrawal of deposits (a bank run).
3. Identify the purpose of bank regulation: Regulations are designed to maintain the stability and trustworthiness of the banking system, which is crucial for economic stability.
4. Focus on depositor protection: One of the primary reasons for bank regulation is to protect depositors' funds, ensuring that their money is safe even if the bank faces financial difficulties.
5. Eliminate incorrect options by understanding their implications: Regulations are not primarily to maximize profits, restrict lending only to government agencies, or eliminate competition, but to safeguard the financial system and depositors.