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The Valuation of Deposit Insurance Premiums Based on a Specific Bank's Official Default Probability

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  • Shu Ling Chiang

    (National Kaohsiung Normal University, Taiwan)

  • Ming Shann Tsai

    (National University of Kaohsiung, Taiwan)

Abstract

This study presents a formula for valuating a deposit insurance (DI) premium based on a specific official default probability. This formula can be used to flexibly determine the DI premium that reflects changes in economic circumstances. We provide a new estimation method to determine the implied asset risk based on the efficient frontier between asset value and asset risk. Doing so avoids the problem for estimating a bank's assets and asset risk using market equity data. Empirical evidence shows current DI premium assumes that banks have too high default rates. We suggest the DI premium should be lower for banks that fully obey the financial supervisory regulations. Doing so should incentivize these banks to decrease their likelihood of default by strictly implementing financial regulations, thus stabilizing financial environment. We also suggest a new dynamic method to help them determine reasonable DI premiums and maintain the target level of DIF reserves.

Suggested Citation

  • Shu Ling Chiang & Ming Shann Tsai, 2019. "The Valuation of Deposit Insurance Premiums Based on a Specific Bank's Official Default Probability," Multinational Finance Journal, Multinational Finance Journal, vol. 23(3-4), pages 141-167, September.
    • Handle: RePEc:mfj:journl:v:23:y:2019:i:3-4:p:141-167
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    References listed on IDEAS

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    More about this item

    Keywords

    deposit insurance; premium; default probability; financial supervision;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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