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On Flexibility, Capital Structure, and Investment Decisions for the Insured Bank


Peter H. Ritchken


Case Western Reserve University - Department of Banking & Finance

Ramon P. DeGennaro


University of Tennessee, Knoxville - Department of Finance

James B. Thomson


University of Akron

Anlong Li


Spot Trading LLC; Portunes LLC; Barclays Capital



Abstract:     
Most models of deposit insurance assume that the volatility of a bank's assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders can respond to market events by adjusting previous investment and leverage decisions. This paper presents a dynamic model of a bank that allows for such behavior. The flexibility of being able to respond dynamically to market information has value to equityholders. The impact and value of this flexibility option are explored under a regime in which flat-rate deposit insurance is provided.

Keywords: deposit insurance, dynamic model, volatility, capital structure

JEL Classification: G2, G0

working papers series


Date posted: May 5, 2003  

Suggested Citation

Ritchken, Peter H., DeGennaro, Ramon P., Thomson, James B. and Li, Anlong, On Flexibility, Capital Structure, and Investment Decisions for the Insured Bank. Available at SSRN: http://ssrn.com/abstract=378040

Contact Information

Peter H. Ritchken
Case Western Reserve University - Department of Banking & Finance ( email )
10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)
Ramon P. DeGennaro (Contact Author)
University of Tennessee, Knoxville - Department of Finance ( email )
423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)
James B. Thomson
University of Akron ( email )
Akron, OH 44325-4803
United States
Anlong Li
Spot Trading LLC ( email )
440 S Lasalle Street
Chicago, IL 60605
United States
312-208-0051 (Phone)
Portunes LLC ( email )
chicago, IL
United States
Barclays Capital ( email )
745 Seventh Ave.
New York, NY 10019
United States
212-528-8256 (Phone)
212-412-7408 (Fax)
Feedback to SSRN (Beta)


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