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On flexibility, capital structure, and investment decisions for the insured bank

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Author Info
Peter Ritchken
James Thomson
Ray DeGennaro
Anlong Li

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Abstract

Most 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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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9110.

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Date of creation: 1991
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Handle: RePEc:fip:fedcwp:9110

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Keywords: Deposit insurance ; Bank capital;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June. [Downloadable!] (restricted)
  2. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  3. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June. [Downloadable!] (restricted)
  4. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April. [Downloadable!] (restricted)
  5. Triantis, Alexander J & Hodder, James E, 1990. " Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-65, June. [Downloadable!] (restricted)
  6. Mark D. Flood, 1990. "On the use of option pricing models to analyze deposit insurance," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 19-35. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sangkyun Park & Stavros Peristiani, 2001. "Are bank shareholders enemies of regulators or a potential source of market discipline?," Staff Reports 138, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  2. Robert R. Bliss, 2000. "The pitfalls in inferring risk from financial market data," Working Paper Series WP-00-24, Federal Reserve Bank of Chicago. [Downloadable!]
  3. Anlong Li & Peter Ritchken & L. Sankarasubramanian & James B. Thomson, 1993. "Regulatory taxes, investment, and financing decision for insured banks," Working Paper 9303, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Stavros Panageas, 2009. "Bailouts, the Incentive to Manage Risk, and Financial Crises," NBER Working Papers 15058, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Peter Ritchken & James Thomson & Ivilina Popova, 1995. "The changing role of banks and the changing value of deposit guarantees," Working Paper 9502, Federal Reserve Bank of Cleveland. [Downloadable!]
  6. Robert R. Bliss, 2001. "Market discipline and subordinated debt: a review of some salient issues," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 24-45. [Downloadable!]
  7. Ramon P. DeGennaro & Larry H. Lang & James B. Thomson, 1991. "Troubled savings and loan institutions: voluntary restructuring under insolvency," Working Paper 9112, Federal Reserve Bank of Cleveland. [Downloadable!]
  8. David Marshall & Subu Venkataraman, 1997. "Bank capital standards for market risk: a welfare analysis," Working Paper Series, Issues in Financial Regulation WP-97-09, Federal Reserve Bank of Chicago. [Downloadable!]
  9. Giuseppe Vulpes & Reint Gropp & Jukka M. Vesala, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series 150, European Central Bank. [Downloadable!]
    Other versions:
  10. Joseph G. Haubrich & James B. Thomson, 1994. "A conference on federal credit allocation," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13. [Downloadable!]
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