On bank’s risk incentives under deposit insurance system

Hiroki Seta and Hiroshi Inoue ()
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Hiroki Seta: Department of Business Economics, School of Management, Tokyo University of Science, Fujimi, Chiyoda-ku, Tokyo 102-0071, Japan
Hiroshi Inoue: Department of Business Economics, School of Management, Tokyo University of Science, Fujimi, Chiyoda-ku, Tokyo 102-0071, Japan

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 04, 1-40

Abstract: This paper refers to bank’s risk incentive problem which is one of the factors behind its risky behavior toward investing in projects. Using the relevant distributions of depositors’ bank balances, we study the risk incentive influence. As a result, the bank’s risk incentive is shown to be classified regarding depositors and bank’s shareholders who increase its capital, indicating the former being positive value and the latter negative. In this study, we use perpetual American put option and perpetual down and out call option. Thus, we examine changes in the influence of these incentives, showing several numerical examples.

Keywords: Risk incentive; deposit insurance system; option pricing; perpetual down and out call option; perpetual American put option (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S2424786319500397

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