An Analytical Model for the FDIC Deposit Insurance Premium

16 Pages Posted: 22 Feb 2007

Date Written: November 2006

Abstract

The Federal Deposit Insurance Corporation (FDIC) is moving towards charging risk-based deposit insurance premium. Since it insures bank deposits, the FDIC is exposed to the counter-party credit risk, that is, the FDIC may suffer losses when one or more insured institutions default. This paper presents a framework for determining the deposit insurance premium based on the credit risk an insured institution imposes on the FDIC. In this framework, an analytical model within the asymptotic single risk factor framework is first developed to determine the appropriate size of the deposit insurance funds. The main drivers are each insured institution's probability of default, insured deposits, liability structure, asset correlation between the institutions, asset severity and the probability the total deposit insurance funds are adequate to cover the losses during a given period. The premium is then determined by this target deposit insurance fund and the funds already in place. This framework is timely from three perspectives. First, it enables the FDIC to calibrate the target ratios of the deposit insurance fund to levels of confidence and to see if this is what the US Congress had in mind in terms of how remote they would want the chances of deposit insurance fund running out. Second, the framework provides a benchmark for sanity check for premium being charged to an individual bank or a group of similar banks. Third, some details of the FDIC proposals are still to be parameterized. The results of the model may help the FDIC in honing down those parameters.

Keywords: FDIC, credit risk, insurance premium

Suggested Citation

Dev, Ashish and Li, Sen and Wan, Zailong, An Analytical Model for the FDIC Deposit Insurance Premium (November 2006). Available at SSRN: https://ssrn.com/abstract=964622 or http://dx.doi.org/10.2139/ssrn.964622

Ashish Dev

KeyBank ( email )

Headquarters
127 Public Square 0403
Cleveland, OH 44114
United States

Sen Li (Contact Author)

KeyBank ( email )

Headquarters
127 Public Square 0403
Cleveland, OH 44114
United States
216-828-7569 (Phone)
216-828-7483 (Fax)

Zailong Wan

KeyBank ( email )

Headquarters
127 Public Square 0403
Cleveland, OH 44114
United States

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