The Effect of Industry Consolidation and Deposit Insurance Reform on the Resiliency of the U.S. Bank Insurance Fund

49 Pages Posted: 7 Jul 2007

See all articles by Kenneth D. Jones

Kenneth D. Jones

State Street Corporation

Robert Oshinsky

U.S. Federal Deposit Insurance Corporation (FDIC) - Division of Research and Statistics

Date Written: April 25, 2007

Abstract

We examine the effects of structural change in the U.S. banking industry, as well as key regulatory changes, including recently enacted deposit insurance reform legislation, on the resiliency of the FDIC-administered bank insurance fund (BIF) by estimating and comparing the probability of BIF insolvency over time. We do this using a Markov-switching model that relies on historical patterns of BIF disbursements to define the probability of switching among three "states" of the banking industry's financial health. Monte Carlo simulations are then performed to project the financial condition of the BIF over a fifty year period. Our results indicate that the insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the ten largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of BIF insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.

Keywords: Deposit Insurance, Bank Insurance Fund, Markov-Switching Model, Monte Carlo Simulation

JEL Classification: G28, C15

Suggested Citation

Jones, Kenneth D. and Oshinsky, Robert, The Effect of Industry Consolidation and Deposit Insurance Reform on the Resiliency of the U.S. Bank Insurance Fund (April 25, 2007). Available at SSRN: https://ssrn.com/abstract=997844 or http://dx.doi.org/10.2139/ssrn.997844

Kenneth D. Jones (Contact Author)

State Street Corporation ( email )

1 Lincoln Street
Boston, MA 02111
United States
617-662-0370 (Phone)

Robert Oshinsky

U.S. Federal Deposit Insurance Corporation (FDIC) - Division of Research and Statistics ( email )

550 Seventeenth Street, NW
Washington, DC 20057
United States
202-898-3813 (Phone)
202-898-7149 (Fax)

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