On flexibility, capital structure and investment decisions for the insured bank
AbstractMost 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 17 (1993)
Issue (Month): 6 (December)
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Web page: http://www.elsevier.com/locate/jbf
Other versions of this item:
- Peter Ritchken & James Thomson & Ray DeGennaro & Anlong Li, 1991. "On flexibility, capital structure, and investment decisions for the insured bank," Working Paper 9110, Federal Reserve Bank of Cleveland.
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