Risk-Based Capital Standards, Deposit Insurance and Procyclicality

FDIC Center For Financial Research Working Paper No. 2004-05

52 Pages Posted: 1 Apr 2005

Date Written: November 2, 2004

Abstract

This article shows that risk-based deposit insurance premiums generate smaller procyclical effects than do risk-based capital requirements. Thus, Basel II's procyclical impact can be reduced by integrating risk-based deposit insurance. If deposit insurance is structured as a moving average of contracts, its procyclical effects can be decreased further. Empirical illustrations of this are presented for 42 banks over the period 1987 to 1996. The results confirm that lengthening the contracts' maturities intertemporally smoothes premiums but raises the average premium level needed to compensate the insurer for greater systematic risk. The distribution of risk-based premiums across banks is skewed.

Keywords: Capital standards, deposit insurance, procyclical

JEL Classification: G21, G22, G28

Suggested Citation

Pennacchi, George G., Risk-Based Capital Standards, Deposit Insurance and Procyclicality (November 2, 2004). FDIC Center For Financial Research Working Paper No. 2004-05, Available at SSRN: https://ssrn.com/abstract=681229 or http://dx.doi.org/10.2139/ssrn.681229

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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