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

Posted: 5 May 2003

See all articles by Peter H. Ritchken

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

KL Capital

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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, synamic model, volatility, capital structure

JEL Classification: G2, G0

Suggested Citation

Ritchken, Peter H. and DeGennaro, Ramon P. and Thomson, James B. and Li, Anlong, On Flexibility, Capital Structure, and Investment Decisions for the Insured Bank. Journal of Banking and Finance, Vol. 27. Available at SSRN: https://ssrn.com/abstract=404360

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

KL Capital ( email )

141 Jackson Blvd
Suite 1650
Chcago, IL 60604
United States

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