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Levy Processes and the Financial Crisis: Can We Design a More Effective Deposit Protection?

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  • Sara Maccaferri
  • Jessica Cariboni
  • Wim Schoutens

Abstract

Deposit Guarantee Schemes (DGSs) are institutions whose main aim is to provide a safety net for depositors. If a bank fails, depositors will recover their bank deposits up to a certain limit. During the recent financial crisis, DGSs were brought at the centre of the political and financial debate, especially due to the fact that the some DGSs resulted incapable to react to the crisis because of the lack of funds set aside. In this paper we propose to use L¨¦vy processes to simulate the loss distribution of deposits insured by a DGS in case of banks¡¯ failure. The simulated distribution can be used to design an effective DGS. By simulating banks¡¯ default and the corresponding losses, our model allows defining a target level for the funds to be collected in order to promptly and effectively respond to financial turmoil and protect the citizens. The proposed approach is applied to a sample of Italian banks.

Suggested Citation

  • Sara Maccaferri & Jessica Cariboni & Wim Schoutens, 2013. "Levy Processes and the Financial Crisis: Can We Design a More Effective Deposit Protection?," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 4(1), pages 5-28, January.
    • Handle: RePEc:jfr:ijfr11:v:4:y:2013:i:1:p:5-28
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    References listed on IDEAS

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    Cited by:

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    2. García-Céspedes, Rubén & Moreno, Manuel, 2014. "Estimating the distribution of total default losses on the Spanish financial system," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 242-261.
    3. Fernández-Aguado, Pilar Gómez & Martínez, Eduardo Trigo & Ruíz, Rafael Moreno & Ureña, Antonio Partal, 2022. "Evaluation of European Deposit Insurance Scheme funding based on risk analysis," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 234-247.
    4. Benczur, Peter & Cannas, Giuseppina & Cariboni, Jessica & Di Girolamo, Francesca & Maccaferri, Sara & Petracco Giudici, Marco, 2017. "Evaluating the effectiveness of the new EU bank regulatory framework: A farewell to bail-out?," Journal of Financial Stability, Elsevier, vol. 33(C), pages 207-223.

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