Pricing fair deposit insurance: Structural model approach

Tzu Tai; Cheng Few Lee; Tian Shyr Dai; Keh Luh Wang; Hong Yi Chen

doi:10.1142/9789811202391_0015

Pricing fair deposit insurance: Structural model approach

Tzu Tai, Cheng Few Lee, Tian Shyr Dai, Keh Luh Wang, Hong Yi Chen

Department of Information Management and Finance

Research output: Chapter in Book/Report/Conference proceeding › Chapter › peer-review

Abstract

In this chapter, we propose the structural model in terms of the Stair Tree model and barrier option to evaluate the fair deposit insurance premium in accordance with the constraints of the deposit insurance contracts and the consideration of bankruptcy costs. First, we show that the deposit insurance model in Brockman and Turle (2003) is a special case of our model. Second, the simulation results suggest that insurers should adopt a forbearance policy instead of a strict policy for closure regulation to avoid losses from bankruptcy costs. An appropriate deposit insurance premium can alleviate potential moral hazard problems caused by a forbearance policy. Our simulation results can be used as reference in risk management for individual banks and for the Federal Deposit Insurance Corporation (FDIC).

Original language	English
Title of host publication	Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)
Publisher	World Scientific Publishing Co.
Pages	583-602
Number of pages	20
ISBN (Electronic)	9789811202391
ISBN (Print)	9789811202384
DOIs	https://doi.org/10.1142/9789811202391_0015
State	Published - 1 Jan 2020

Keywords

Bankruptcy
Barrier option
Deposit insurance
FDIC
Insurance premium
Moral hazard
Policy
Tree model

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10.1142/9789811202391_0015

Cite this

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Pricing fair deposit insurance: Structural model approach

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