Deposit Insurance and Risk Management of the U.S. Banking System: How Much? How Safe? Who Pays?

Andrew Kuritzkes, Til Schuermann and Scott Weiner

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: We examine the question of deposit insurance through the lens of risk management by addressing three key issues: 1) how big should the fund be; 2) how should coverage be priced; and 3) who pays in the event of loss. We propose a risk-based premium system that is explicitly based on the loss distribution faced by the FDIC. The loss distribution can be used to determine the appropriate level of fund adequacy and reserving in terms of a stated confidence interval and to identify risk-based pricing options. We explicitly estimate that distribution using two different approaches and find that reserves are sufficient to cover roughly 99.85% of the loss distribution corresponding to about a BBB+ rating. We then identify three risk-sharing alternatives addressing who is responsible for funding losses in different parts of the loss distribution. We show in an example that expected loss based pricing, while appropriately penalizing riskier banks, also penalizes smaller banks. By contrast, unexpected loss contribution based pricing significantly penalizes very large banks because large exposures contribute disproportionately to overall (FDIC) portfolio risk.

Keywords: Deposit insurance pricing; loss distribution; risk-based premiums. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2002-04
New Economics Papers: this item is included in nep-ias and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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