Designing sound deposit insurances

A multiperiod model for estimating the cost of deposit insurance under the Basel III minimum capital requirement

“…More recent research articles on DI include Lee, Lee et al, Chen and Chang, and Assa and Okhrati . Lee developed a multiperiod DI pricing model that explicitly considers the effects of capital standards, the possibility of capital forbearance, and moral hazard behaviour.…”

“…Although the bank faces the two conflicting capitalization policies, Chen and Chang suggest that the loan portfolio should be as diverse as possible in order to produce better profitability and greater safety for the bank. Assa and Okhrati set up a simple theoretical framework for a bank that buys a DI policy to protect its position against market losses. The main objective of the paper is to find the optimal DI contract that does not produce the risk of moral hazard, while at the same time keeping the bank's position solvent.…”

“…Assa and Okhrati set up a simple theoretical framework for a bank that buys a DI policy to protect its position against market losses. The main objective of the paper is to find the optimal DI contract that does not produce the risk of moral hazard, while at the same time keeping the bank's position solvent. Moral hazard refers to the excessive risk‐taking behaviour of banks that occurred during the 2007‐2009 financial crisis under inappropriate DI policies.…”

“…Moral hazard refers to the excessive risk‐taking behaviour of banks that occurred during the 2007‐2009 financial crisis under inappropriate DI policies. Assa and Okhrati observed that an optimal policy is a multi‐layer policy. In particular, Assa and Okhrati obtained a closed form solution for the optimal DI contracts when a bank measures its risk by either value at risk or conditional value at risk.…”

“…Assa and Okhrati observed that an optimal policy is a multi‐layer policy. In particular, Assa and Okhrati obtained a closed form solution for the optimal DI contracts when a bank measures its risk by either value at risk or conditional value at risk. Assa and Okhrati showed that the optimal solutions for these two cases are two‐layer policies.…”