Revisiting the valuation of deposit insurance
Journal
Journal of Futures Markets
Journal Volume
42
Journal Issue
1
Pages
77-103
Date Issued
2022
Author(s)
Abstract
This study proposes a framework for pricing deposit insurance that evaluates the effect of depositor preference laws and the issuance of contingent capital bonds. Four main findings emerge from this study. First, traditional option pricing models of deposit insurance overestimate insurance premiums. Second, only large issuances of contingent capital bonds decrease deposit insurance premiums under depositor preference. Third, the issuance of contingent capital bonds can partially offset banks' excessive risk-taking caused by regulatory forbearance. Finally, although large banks have implied too-big-to-fail risks, the deposit insurer's costs from large banks are not nearly as high as reported in previous studies. ? 2021 Wiley Periodicals LLC
Subjects
contingent capital bonds
deposit insurance
depositor preference
Type
journal article