Designing Countercyclical and Risk Based Aggregate Deposit Insurance Premia

FDIC, Center For Financial Research Working Paper No. WP 2007-02

31 Pages Posted: 22 Feb 2007

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Date Written: November 2006

Abstract

This paper proposes an aggregate deposit insurance premium design that is risk-based in the sense that the premium structure ensures the deposit insurance system has a target of survival over the longer term. Such a premium system naturally exceeds the actuarily fair value and leads to a growth in the insurance fund over time. The proposed system builds in a swap in premia that reduces premia when fund size exceeds a threshold. In addition, we build in a swap contract that trades premia in good times for relief in bad times.

Keywords: Deposit insurance, Procyclicality, Default probabilty, Loss distributions

JEL Classification: G28, G22, G21

Suggested Citation

Jarrow, Robert A. and Madan, Dilip B. and Unal, Haluk, Designing Countercyclical and Risk Based Aggregate Deposit Insurance Premia (November 2006). FDIC, Center For Financial Research Working Paper No. WP 2007-02, Available at SSRN: https://ssrn.com/abstract=964481 or http://dx.doi.org/10.2139/ssrn.964481

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

Haluk Unal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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