The pricing of deposit insurance in the presence of systematic risk

Lee,S-C, Lin,C-T and Tsai,M-S 2015, The pricing of deposit insurance in the presence of systematic risk, Journal of banking and finance, vol. 51, pp. 1-11, doi: 10.1016/j.jbankfin.2014.10.012.

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Title The pricing of deposit insurance in the presence of systematic risk
Author(s) Lee,S-C
Lin,C-TORCID iD for Lin,C-T
Journal name Journal of banking and finance
Volume number 51
Start page 1
End page 11
Publisher Elsevier BV
Place of publication Amsterdam, Netherlands
Publication date 2015-02
ISSN 0378-4266
Keyword(s) Asset correlation
Bank size
Deposit insurance
Systematic risk
Summary Based on the Merton (1977) put option framework, we develop a deposit insurance pricing model that incorporates asset correlations, a measurement for the systematic risk of a bank, to account for the risk of joint bank failures. Estimates from our model suggest that actuarially fair risk-based deposit insurance that considers only individual bank failure risk is underpriced, leaving insurance providers exposed to net losses. Our estimates also capture the size premium where big banks are priced with higher deposit insurance than small banks. This result is particularly relevant to the current regulatory concerns on big banks that are too-big-to-fail. Above all, our approach provides a unifying framework for integrating risk-based deposit insurance with risk-based Basel capital requirements.
Language eng
DOI 10.1016/j.jbankfin.2014.10.012
Field of Research 150203 Financial Institutions (incl Banking)
Socio Economic Objective 900101 Finance Services
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2015, Elsevier BV
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