Forbearance and Pricing Deposit Insurance in a Multiperiod Framework

Duan, Jin‐Chuan; Yu, Min‐Teh

doi:10.2307/253639

Cited by 36 publications

(41 citation statements)

References 16 publications

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“…See, e.g., Buser, Chen, and Kane [1981]; Kane [1989]; Calomiris [1990]; Kane and Yu [1995]; Duan and Yu [1994]; Wheelock and Wilson [1994]. McCulloch [1981McCulloch [ , 1985 shows that government deposit insurance may furthermore provide financial intermediaries with macroeconomically undesirable incentives to transform maturities between assets and liabilities, leading to aggregate economic fluctuations.…”

Section: Notesmentioning

confidence: 99%

Government Deposit Insurance and the Diamond-Dybvig Model

McCulloch¹,

Yu²

1998

Geneva Pap R I-Iss P

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The apparent banking market failure modeled by Diamond and Dybvig [1983] rests on their inconsistently applying their "sequential servicing constraint" to private banks but not to their government deposit insurance agency. Without this inconsistency, banks can provide optimal risk-sharing without tax-based deposit insurance, even when the number of "type 1" agents is stochastic, by employing a "contingent bonus contract." The threat of disintermediation noted by Jacklin [1987] in the nonstochastic case is still present but can be blocked by contractual trading restrictions. This article complements Wallace [1988], who considers an alternative resolution of this inconsistency.

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Section: Notesmentioning

confidence: 99%

Government Deposit Insurance and the Diamond-Dybvig Model

McCulloch¹,

Yu²

1998

Geneva Pap R I-Iss P

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“…Allen and Saunders departed from the tradition of modelling DI in this way, as they found that DI can be described as a callable put in the sense that DI is a perpetual put option with the insuring agency holding the right to terminate the put prematurely. Duan and Yu proposed an alternative way of interpreting DI in a multiperiod framework. Duan and Yu assumed that defaulting banks have their assets reset to the level of the outstanding deposits plus accrued interests when an insolvency resolution occurs.…”

Section: Introductionmentioning

confidence: 99%

“…Duan and Yu proposed an alternative way of interpreting DI in a multiperiod framework. Duan and Yu assumed that defaulting banks have their assets reset to the level of the outstanding deposits plus accrued interests when an insolvency resolution occurs. According to the DI contract, the amount required to reset the assets is the legal liability of the insuring agency.…”

Section: Introductionmentioning

confidence: 99%

“…According to the DI contract, the amount required to reset the assets is the legal liability of the insuring agency. This set‐up is supported by historical data on DI from the United States . In order to resolve the majority of defaulting depository institutions, either the purchase‐and‐assumption method or the government‐assisted merger methods were used .…”

Section: Introductionmentioning

confidence: 99%

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

Muller

2020

Math Methods in App Sciences

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Communicated by: M. RasmussenUnder the Basel III regime, a commercial bank is considered adequately capitalized if it maintains a ratio of capital to total risk-weighted assets or capital adequacy ratio (CAR) of at least 8%. We model a commercial bank that complies with Basel III's minimum capital requirement on an interval [0, T] for T > 0. The bank model is achieved via a specific rate of capital influx that fixes the bank's CAR at the minimum prescribed level of 8%. On the basis of this capital influx rate, we derive models for the bank's asset portfolio and capital dynamics required for maintaining the CAR at the minimum prescribed level. For the aforementioned bank, we further study a deposit insurance (DI) pricing problem with a coverage horizon equal to T years. More specifically, we employ a multiperiod DI pricing model to approximate the cost of DI for the bank on the interval [0, T], where the constant (minimum) CAR is maintained. We study the behaviours of the models leading to the constant (minimum) CAR, and the behaviour of the DI premium estimate by means of numerical simulations. In the simulation study pertaining to the DI premium estimate specifically, we determine the effects of changes in the bank's initial leverage level (deposit-to-asset ratio), the DI coverage horizon, and the volatility of the asset portfolio on the DI premium estimate.

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“…The former uses arbitrage pricing theory to develop equilibrium premia for property-liability insurers, while the latter presents a contingent-claim model of the property-liability firm. Yu (1994Yu ( , 1999, who model deposit insurance in a multiperiod framework by allowing contingent responses by the bank and the regulator. We have, however, adapted it to reflect the regulatory reality of the insurance market in the U.S.…”

Section: Introductionmentioning

confidence: 99%