Deposit insurance premiums and the value of the banking insurance fund: should they be linked?

George Pennacchi

Proceedings, 1998, issue Sep

Abstract: A common feature of many insurance systems is that they are \\"backed\\" by an insurance fund and insurance premiums are adjusted to target this fund's balance. This study analyzes the fund targeting policy of the Federal Deposit Insurance Corporation (FDIC). It examines the distortions to banks' cost of deposit financing that result from setting premiums in this manner. The study's framework is a multi-period, multi-bank contingent claims model where the stochastic rates of return on individual banks' assets are assumed to be correlated and match the actual empirical distribution of a sample of U.S. banks. The model identifies factors that are likely to exacerbate or ameliorate distortions due to insurance mis-pricing. The relative merits of a targeting policy and a flat-rate insurance policy are discussed, and the real effects of insurance mis-pricing are estimated.

Keywords: Deposit; insurance (search for similar items in EconPapers)
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfpr:y:1998:i:sep:x:8

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