The valuation of deposit insurance allowing for the interest rate spread and early-bankruptcy risk
Shu Ling Chiang and
Ming Shann Tsai
The Quarterly Review of Economics and Finance, 2020, vol. 76, issue C, 345-356
Abstract:
Our proposed model allows for inclusion of the interest rate spread (defined as the difference between the lending rate and the borrowing rate) and the risk of a bank’s early bankruptcy in the derivation of a closed-form pricing formula for calculating deposit insurance premiums. This is important because, in practice, these two factors significantly influence the expected value of a bank’s assets. Also, we use a method that considers the possibility of early bankruptcy to derive new formulas for calibrating the necessary parameters. Data from Taiwanese banks are used to illustrate the application of our model. Our empirical results show that the spread of the interest rate is negatively correlated with the premium. This result is consistent with our theoretical inferences. Moreover, premiums associated with a risk of early bankruptcy are always higher than premiums not associated with such a risk. Using the example of Taiwanese banks, we show that the traditional model underprices the premium by 20.81% if it does not consider the risk of early bankruptcy.
Keywords: Deposit insurance; Premiums; Interest rate spread; Early bankruptcy (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062976919300651
Full text for ScienceDirect subscribers only
Related works:
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:eee:quaeco:v:76:y:2020:i:c:p:345-356
DOI: 10.1016/j.qref.2019.09.008
Access Statistics for this article
The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty
More articles in The Quarterly Review of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().