Fair Premium Rate of the Deposit Insurance System based on Banks’ Creditworthiness

Naoyuki Yoshino (), Farhad Taghizadeh-Hesary () and Farhad Nili

No 757, ADBI Working Papers from Asian Development Bank Institute

Abstract: Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at least a dual fair premium rate system based on the creditworthiness of financial institutions, as a singular premium system for all banks will have a moral hazard. In this paper, we develop a theoretical as well as an empirical model for calculating dual fair premium rates. Our definition of a fair premium rate is a rate that can cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in the case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting nonperforming loans, we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction model. Our results show that deposit insurance premium rates need to vary in relation to banks’ creditworthiness.

Keywords: deposit insurance premium rate; forecasting nonperforming loans; idiosyncratic shocks (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2017-07-05
New Economics Papers: this item is included in nep-ban, nep-mac and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.adb.org/sites/default/files/publication/327601/adbi-wp757.pdf Full text (application/pdf)

Related works:
Journal Article: Fair premium rate of the deposit insurance system based on banks’ creditworthiness (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:adbiwp:0757

Access Statistics for this paper

More papers in ADBI Working Papers from Asian Development Bank Institute Kasumigaseki Building 8F, 3-2-5, Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan. Contact information at EDIRC.
Bibliographic data for series maintained by ADB Institute ().