A Note on Bank Default Risk and Delivery Channel Strategy under Deposit Insurance Fund Protection

Chen, Shi; Chang, Chuen-Ping; Keh, Kevin P.

doi:10.5430/ijfr.v5n4p114

Cited by 2 publications

(2 citation statements)

References 6 publications

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“…Note 4. Literature on protecting the insurance funds and the stability of the banking system includes, for example, Mazumdar (1997), Bhattacharya et al (2002), Episcopos (2008), and Chen et al (2014). Our paper may be viewed as complementary to these studies by adding the issue of BCAA.…”

Section: Notesmentioning

confidence: 91%

Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection

Chang

Chen²

2014

International Journal of Financial Research

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We study the optimal bank interest margin and default risk under the capped ratio schedule of government capital instruments in the Basel III Capital Adequacy Accord and the Deposit Insurance Fund arrangement program. We show that an increase in the capped ratio (a decrease in the capped government capital injection) increases the default risk in the bank's equity return at a reduced interest margin. Regulatory deposit insurance fund protection reinforces the reduced bank interest margin and the increased default risk. The capped ratio schedule as well as the fund protection program makes the bank more prone to loan risk-taking, thereby adversely affecting the stability of banking system. This paper suggests that the two means of government intervention in response to the recent financial crisis might be not appropriate for a bank in distress, particularly from the standpoint of bank failure.

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Section: Notesmentioning

confidence: 91%

Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection

Chang

Chen²

2014

International Journal of Financial Research

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“…As we discuss further below, the call captures the like, the DIC reveals the dislike, and the default probability demonstrates the weight-average factor of our model. We assume that the bank is a loan rate setter and loan demand is a downward-sloping function of the loan rate L (Chen et al, 2014 …”

Section: The Modelmentioning

confidence: 99%

A Barrier Option Utility Framework for Bank Interest Margin under Government Bailout

Lin¹,

Jou²,

Lin³

2014

International Journal of Financial Research

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The barrier options theory of corporate security valuation is applied to the contingent claims of a distressed bank under a bailout program of distressed loan purchases. In particular, the bank acts as if it has a single utility function that positively weights equity returns like, but negatively weights bankruptcy dislike. We show that an increase in the amount of distressed loan purchases decreases the loan amount at an increased margin when buying distressed loan amount is high. Bailout as such makes the bank less prone to loan risk taking, thereby contributing the stability of the banking system. A numerical exercise shows that the market-based estimates of the expected utility of bank equity returns which ignore the weights (a standard down-and-out call option) or the dislike (a standard call option) lead to significant overestimation.

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A Note on Bank Default Risk and Delivery Channel Strategy under Deposit Insurance Fund Protection

Cited by 2 publications

References 6 publications

Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection

Bank Interest Margin and Default Risk under Basel III Capped Capital Adequacy Accord and Regulatory Deposit Insurance Fund Protection

A Barrier Option Utility Framework for Bank Interest Margin under Government Bailout

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