Two Essays on the Deposit Insurance Adoption and the Bank Margin Loans Valuation
Date Issued
2008
Date
2008
Author(s)
Wu, Wei-Hsiung
Abstract
The first part is focusing on the policy impact of deposit insurance scheme. With the implementation of Basel Accord, bank capital standards are unified worldwide, but the closure policies are different across nations. In Acharya (2003), it is shown that under the pressure of international competition, different closure policies will converge eventually and lead to more unstable financial environments. In this paper, we show that despite of the international competition, as long as the attitudes of bank regulators toward forbearance are heterogeneous, closure policies remain divergent. The implication of this finding is that the effect of one regulatory instrument cannot be evaluated alone without considering feedbacks from other related tools. The second part is to discuss whether the margin loan rates in Taiwan are over-charged. A collateral loan can be priced by a put option. The intuition behind is that, at maturity date, if the lender repays the loans, then the collateral asset is returned. On the contrary, if the lender fails to repay the loans, the collateral asset is liquidated. But if the value of the collateral asset cannot meet the liabilities, the borrower absorbs the losses. Thus, the collateral loan can be compared as a put option with the collateral serving as the underlying asset, and the face value of the debt serving as the strike price. The margin loans are a kind of collateral loan, and hence can be priced by the put option model. In this paper, we derive a simple formula to calculate the costs of the margin loans. Using data in Taiwan, the empirical results show that the costs of margin loans are overcharged. The lack of competition in the margin loans market is a major reason.
Subjects
Deposit Insurance
Forbearance
Capital Requirements
Basel Accord
Margin Loans
Option Pricing Model
Type
thesis
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