Financial Markets & Institutions

Case Study 2

The U.S. Banking Panic of 1933 and Federal Deposit Insurance

Using the Harvard Business Case Study, The U.S. Banking Panic of 1933 and Federal Deposit
Insurance, answer the following questions by creating and submitting a Word document. Your
answers should be a maximum of 1 page per question (and very possibly less).

1. In 1929 there were more than 25,000 commercial banks in the U.S. Today there are still
approximately 7000 banks. In most other countries there are just a handful of major banks –
often 4 to 8 institutions dominate the market place. What explains the vastly different character
of the banking system in the U.S. from that of other countries? Similarly, most other countries
have not in the past provided government sponsored deposit insurance, though some have put it
in place as part of their response to the credit crisis. Does the unique structure of the U.S.
banking system indicate a greater need for such insurance?

2. As the case study notes, the banking panic of 1933 was not unique. There had been many
previous banking panics periodically over the previous century. What made the banking panic of
1933 so extraordinary that it required significant action on the part of the U.S. government?

3. Similarly, what was so extraordinary about the credit crisis of 2007-2010 that it has become
the centerpiece of economic policy and required such unusual actions as bailouts, government
injections of equity into financial institutions, emergency lending facilities, etc.?

4. Perhaps the best known quotation of Roosevelt's was "The only thing we have to fear is fear
itself". How does the thought behind that quotation fit into the provision of Federal deposit
insurance?  How does it relate to the response by governments around the world to the current
credit crisis?