Bank deposit insurance and business cycles: controlling the volatility of risk-based premiums

George Pennacchi

Conference Series ; [Proceedings], 2002

Abstract: Proposals to make deposit insurance risk-based need to consider how premiums would fluctuate over the business cycle. This paper derives a new deposit insurance contract that has the following three features: 1) it is fairly priced in the sense that the insurer conveys no subsidy to the bank; 2) the insurance rate can be made as stable as desired by lengthening the \\"average\\" maturity of the contract; 3) the rate can be frequently updated as new information regarding the bank's financial condition is obtained. These characteristics are achieved with a contract that is a combination of several long-term ones whose contract intervals partially overlap. Relative to a standard, short-term contract, this \\"moving average\\" contract reduces the volatility of a bank's insurance rates and avoids payment of excessively high premiums during times of financial distress. ; Estimates of fair insurance rates under such a contract are presented for 42 banks based on data over the period 1987 to 1996. While lengthening the average maturity of the contract reduces the volatility of insurance rates, it also increases the average level of rates since the insurer requires a greater premium for systemic risk. The paper also finds that the distribution of fair insurance rates across banks is skewed, with most banks paying relatively low rates and a small minority of banks paying much higher ones.

Keywords: Risk management; Deposit insurance (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.bostonfed.org/bankinfo/conevent/slowdown/pennacchi.pdf (application/pdf)

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:fip:fedbcp:y:2002:x:3

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Conference Series ; [Proceedings] from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().