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The changing role of banks and the changing value of deposit guarantees

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  • Peter Ritchken
  • James Thomson
  • Ivilina Popova

Abstract

Using a model for pricing deposit guarantees that treats the bank's investments as a portfolio of default-free bonds and risky loans, the authors push back uncertainty to the level of the borrowing firm and thus are able to explore how factors like firm leverage, loan maturity, and correlation effects between the firm's assets and interest rates affect the value of deposit guarantees.

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File URL: http://www.clevelandfed.org/Research/Workpaper/1995/wp9502.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9502.

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Date of creation: 1995
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Handle: RePEc:fip:fedcwp:9502

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Related research

Keywords: Deposit insurance ; Bank loans;

References

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  1. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, vol. 51(3), pages 439-52, July.
  2. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
  3. Gary Gorton & Richard Rosen, . "Corporate Control, Portfolio Choice, and the Decline of Banking," Rodney L. White Center for Financial Research Working Papers 2-93, Wharton School Rodney L. White Center for Financial Research.
  4. McCulloch, J. Huston, 1981. "Misintermediation and macroeconomic fluctuations," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 103-115.
  5. 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.
  6. John H. Boyd & Mark Gertler, 1994. "Are banks dead? or, are the reports greatly exaggerated?," Working Papers 531, Federal Reserve Bank of Minneapolis.
  7. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
  8. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  9. Anlong Li & Peter Ritchken & L. Sankarasubramanian & James B. Thomson, 1995. "Regulatory taxes, investment and financing decisions for insured banks," Proceedings 477, Federal Reserve Bank of Chicago.
  10. Crouhy, Michel & Galai, Dan, 1991. "A contingent claim analysis of a regulated depository institution," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 73-90, February.
  11. 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.
  12. Klaus Bjerre Toft., 1994. "Exact Formulas for Expected Hedging Error and Transactions Costs in Option Replication," Research Program in Finance Working Papers RPF-237, University of California at Berkeley.
  13. J. Huston McCulloch, 1978. "Interest Rate Risk and Capital Adequacy For Traditional Banks and Financial Intermediaries," NBER Working Papers 0237, National Bureau of Economic Research, Inc.
  14. Boyle, Phelim P & Evnine, Jeremy & Gibbs, Stephen, 1989. "Numerical Evaluation of Multivariate Contingent Claims," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 241-50.
  15. 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.
  16. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
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