Evaluating the Adequacy of the Deposit Insurance Fund: A Credit-Risk Modeling Approach

Increased Concentration in Banking: Megabanks and Their Implications for Deposit Insurance

“…Similar findings were obtained by Bennett (2002) in a study designed specifically to test the robustness of KSW's results. Reemploying the credit risk modeling technique used by KSW, Bennett finds that the reserve ratio of 1.27% for the BIF (as of December 31, 2001) may not even merit a BBB rating.…”

“…The probability of insolvency for the combined fund, for example, was 6.2%, compared with 6.5% for the BIF alone. Results from Bennett (2002) reinforce this finding. In her baseline simulations, the reserve ratio for a merged BIF and SAIF would have to be 2.54% to earn an A rating (corresponding to a 0.07% probability of default under Standard and Poor's rating system).…”

Increased Concentration in Banking: Megabanks and Their Implications for Deposit Insurance

“…least $40 billion in order for the fund to earn an A-rating (0.10% default probability) and from $92 to $156 billion in order to achieve a AAA rating. Similar findings were obtained by Bennett (2002) in a study designed specifically to test the robustness of KSW's results. Reemploying the credit risk modeling technique used by KSW, Bennett finds that the reserve ratio of 1.27% for the BIF (as of December 31, 2001) may not even merit a BBB rating.…”

The effect of industry consolidation and deposit insurance reform on the resiliency of the U.S. bank insurance fund

“…Because of the huge loss exposures associated with megabanks, KSW estimate that BIF reserves would have to be three to five times larger in order for the BIF to achieve a AAA rating-corresponding to a 0.01% probability of default). Similar findings were obtained by Bennett (2001) in a study that was designed to test the robustness of KSW's results. Reemploying the credit risk modeling technique used by KSW, Bennett finds that the BIF reserve ratio of 1.27% (at year-end 2001) may not even merit a BBB bond rating.…”

“…See Standard and Poor's (2007),Table 7. Also, seeBennett (2001) for a discussion of potential sources of bias related to using expected default frequencies based on all corporate credit ratings rather than bank-specific default and rating histories.…”