Credit Risk and the Deposit Insurance Premium, a Note

Posted: 31 Dec 2000

Multiple version iconThere are 2 versions of this paper

Abstract

Previous research on market-based evaluation of deposit insurance premia has modeled the bank as a corporate firm with risky assets and insured liabilities. No attempt was made to analyze explicitly the risk characteristics of bank assets. The purpose of this note is to model bank lending explicitly and calculate loan-risk sensitive insurance premia. The lending function of banks creates the need to model equity as a 'capped' call option. A simulation exercise shows that market-based estimates of deposit insurance premium which ignore the cap lead to significant underestimation.

Keywords: Banking, banking regulation, deposit insurance

JEL Classification: G21, G28

Suggested Citation

Dermine, Jean and Lajeri, Fatma, Credit Risk and the Deposit Insurance Premium, a Note. Journal of Economics and Business. Available at SSRN: https://ssrn.com/abstract=249837

Jean Dermine (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 41 33 (Phone)

Fatma Lajeri

Independent ( email )

No Address Available

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