Bridging the gap from the current deposit insurance fund to a fund target

We use ruin theory, as developed in actuarial science, to study the impact of deposit insurer choices for insurance pricing, funding (capitalization), resolving bank failures and managing investments on the probability of insurer insolvency. We use a risk aggregation model (copula) to combine multiple insurer revenue and expense streams to determine the optimum (target) deposit insurance fund level. Next, we apply ruin theory to different strategies for achieving the target fund through simulated revenue and expense streams and show how these strategies affect the probability of deposit insurer insolvency. For our empirical estimates we use the U.S. Federal Deposit Insurance Corporation’s annual revenues and expenses as a case study. Our results suggest that ruin theory can provide insights about how deposit insurer’s choices for pricing deposit insurance, funding, resolving bank failures and managing investments affect the risk of insurer insolvency. Further, our analysis demonstrates the interactions of key insurance operations on insurer risk, with the implication that deposit insurers should manage these operations jointly rather than independently, as characterized by deposit insurance laws and the academic literature.