You are the head of finance for a very large corporation located in a relatively small town. At a local chamber of commerce meeting, the president of the local bank asks you why you keep the corporation's bank accounts in a very large mid-western bank and not in his local bank. From a risk reduction perspective, how could you answer his question?
What will be an ideal response?
You might employ the concept of too-big-to-fail. As the text points out, the likelihood of bank regulators allowing a large bank to actually fail is very remote. A small bank failure, while certainly disruptive to the bank's depositors and owners, is not likely to cause wide scale panic. If you had your company's funds in this bank and it failed, your company may only recover up to the legal limit. On the other hand, the failure of a large bank might cause wide scale panic, so realizing this, you decide to place your company's funds into a bank that you believe is in the too-big-to-fail category thus protecting your company's deposits.
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