Deposit Insurance and Risk Management: How Much? How Safe? Who Pays?

Wharton Financial Inst. Working Paper No. 02-02

58 Pages Posted: 16 Jan 2002

See all articles by Andrew Kuritzkes

Andrew Kuritzkes

Oliver, Wyman & Company, LLC.

Scott M. Weiner

Alliance Capital Management

Til Schuermann

Oliver Wyman

Date Written: June 3, 2002

Abstract

We examine the question of deposit insurance through the lens of risk management by addressing three key issues: 1) how big should the fund be; 2) how should coverage be priced; and 3) who pays in the event of loss. We propose a risk-based premium system that is explicitly based on the loss distribution faced by the FDIC. The loss distribution can be used to determine the appropriate level of fund adequacy and reserving in terms of a stated confidence interval and to identify risk-based pricing options. We explicitly estimate that distribution using two different approaches and find that reserves are sufficient to cover roughly 99.85% of the loss distribution corresponding to about a BBB+ rating. We then identify three risk-sharing alternatives addressing who is responsible for funding losses in different parts of the loss distribution. We show in an example that expected loss based pricing, while appropriately penalizing riskier banks, also penalizes smaller banks. By contrast, unexpected loss contribution based pricing significantly penalizes very large banks because large exposures contribute disproportionately to overall (FDIC) portfolio risk.

Keywords: Deposit insurance pricing, loss distribution, risk-based premiums.

JEL Classification: G210, G280

Suggested Citation

Kuritzkes, Andrew and Weiner, Scott M. and Schuermann, Til, Deposit Insurance and Risk Management: How Much? How Safe? Who Pays? (June 3, 2002). Wharton Financial Inst. Working Paper No. 02-02. Available at SSRN: https://ssrn.com/abstract=296840 or http://dx.doi.org/10.2139/ssrn.296840

Andrew Kuritzkes

Oliver, Wyman & Company, LLC. ( email )

99 Park Avenue
New York, NY 10016
United States
212-541-8100 (Phone)
212-541-9070 (Fax)

Scott M. Weiner

Alliance Capital Management ( email )

1345 Avenue of the Americas
New York, NY 10105
United States
212-969-6077 (Phone)
212-969-2226 (Fax)

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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