The Deposit Insurance and the Risk-Shifting Incentive Evidence from the Blanket Deposit Insurance in Japan

Brahim Guizani and Wako Watanabe ()

No 2010-004, Keio/Kyoto Joint Global COE Discussion Paper Series from Keio/Kyoto Joint Global COE Program

Abstract: Using the option pricing based model of the deposit insurance, for all the listed banks in Japan, we compute the actuarially fair insurance premium as well as the market value of assets and asset volatility implied by banks' stock prices. The findings based on these variables imply that banks shifted risks to the deposit insurer who charged them risk insensitive premiums. The temporary unlimited blanket coverage of all the deposits had accelerated risk-shifting before the prompt corrective action (PCA) though such acceleration of risk-shifting was prevented when PCA were in effect as the regulatory discipline discouraged banks to lever.

Pages: 38 pages
Date: 2010
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Citations: View citations in EconPapers (3)

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