Bridging the Gap between the Deposit Insurance Fund Target Level and the Current Fund Level
49 Pages Posted: 3 Jun 2020 Last revised: 17 Aug 2020
Date Written: August 15, 2020
We develop a model of the deposit insurer’s choices for pricing deposit insurance, determining the target insurance fund, resolving bank failures and managing the investment portfolio (hereafter, key insurance operations). The academic literature treats these four areas as separate processes and deposit insurance laws address these processes separately. Deposit insurers’ experience, however, shows that there are interactions and trade-offs between key insurance operations. We address the gap between deposit insurance laws and insurers’ practices by developing a model that allows for the interactions of key insurance operations. Specifically, we use a risk aggregation model (copula) that includes income and expenses for key insurance operations in order to estimate the target insurance fund. Next we apply ruin theory to these same income and expense streams and target fund estimates to study their effect on insurer insolvency risk in a case study of the U.S. FDIC.
Keywords: Copula, Deposit Insurance, Ruin Theory, Target Fund
JEL Classification: G21, G28
Suggested Citation: Suggested Citation