Market Valuation of Bank Assets and Deposit Insurance in Canada

Ronald Giammarino, Eduardo Schwartz and Josef Zechner

Canadian Journal of Economics, 1989, vol. 22, issue 1, 109-27

Abstract: The authors examine a sample of Canadian banks and use option pricing theory to infer the market value of a bank's assets from the observed market value and volatility of its equity. They find that market value estimates are significantly different from corresponding book values. These differences vary significantly across banks, suggesting that market values provide bank-specific information not found in book values. They also derive the risk-adjusted deposit insurance premia for these banks. The results suggest that the current flat-rate deposit insurance premium system has resulted in significant cross subsidization among banks.

Date: 1989
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