Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework

34 Pages Posted: 4 Feb 2009 Last revised: 11 Sep 2010

See all articles by Riccardo De Lisa

Riccardo De Lisa

Universita di Cagliari

Stefano Zedda

Universita di Cagliari

Francesco Vallascas

University of Leeds - Division of Accounting and Finance

Francesca Campolongo

Europoean Commission - Joint Reserach Centre; European Commission Joint Research Center

Massimo Marchesi

European Union - European Commission

Date Written: December 26, 2008

Abstract

This paper extends the existing literature on deposit insurance by proposing a new approach for the estimation of the loss distribution of a Deposit Insurance Scheme (DIS) that is based on the Basel 2 regulatory framework. In particular, we generate the distribution of banks’ losses following the Basel 2 theoretical approach and focus on the part of this distribution that is not covered by capital (tail risk). We also refine our approach by considering two major sources of systemic risks: the correlation between banks’ assets and interbank lending contagion.

The application of our model to 2007 data for a sample of Italian banks shows that the target size of the Italian deposit insurance system covers up to 98.96% of its potential losses. Furthermore, it emerges that the introduction of bank contagion via the interbank lending market could lead to the collapse of the entire Italian banking system. Our analysis points out that the existing Italian deposit insurance system can be assessed as adequate only in normal times and not in bad market conditions with substantial contagion between banks.

Overall, we argue that policy makers should explicitly consider the following when estimating DIS loss distributions: first, the regulatory framework within which banks operate such as (Basel 2) capital requirements; and, second, potential sources of systemic risk such as the correlation between banks’ assets and the risk of interbank contagion.

Keywords: Deposit Insurance, Basel 2, Monte Carlo Techniques

JEL Classification: G21, G22

Suggested Citation

De Lisa, Riccardo and Zedda, Stefano and Vallascas, Francesco and Campolongo, Francesca and Marchesi, Massimo, Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework (December 26, 2008). Available at SSRN: https://ssrn.com/abstract=1320613 or http://dx.doi.org/10.2139/ssrn.1320613

Riccardo De Lisa (Contact Author)

Universita di Cagliari ( email )

Cagliari, 09124
Italy

Stefano Zedda

Universita di Cagliari ( email )

Cagliari, 09124
Italy

Francesco Vallascas

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Francesca Campolongo

Europoean Commission - Joint Reserach Centre ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

European Commission Joint Research Center ( email )

1049
Belgium

Massimo Marchesi

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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