The Valuation of FDIC Deposit Insurance Using Option-Pricing Estimates

“…In other words, the assessment of an actuarially fair deposit insurance premium must be based on the risk of individual bank failures together with the risk of widespread bank failures. 2 On the pricing of deposit insurance see Merton (1977Merton ( , 1978, Marcus and Shaked (1984), McCulloch (1985), Ronn and Verma (1986), Pennacchi (1987), and Flannery (1991). Its limits are discussed in Chan et al (1992) and regulatory forbearance in closing banks is addressed in Allen and Saunders (1993) and Dreyfus et al (1994).…”

Section: Motivationmentioning

confidence: 99%

Deposit Insurance in General Equilibrium

2016

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe study the consequences and optimal design of bank deposit insurance in a general equilibrium model. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a deposit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the socially optimal (Arrow-Debreu) allocation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations.

show abstract

“…Protection of franchise value provides a risk-constraining incentive to banks. Marcus (1984) develops Franchise Value Theory (FVT). According to this theory relationship between franchise value and firm risktaking is negative.…”

Section: Financial Stabilitymentioning

confidence: 99%