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Bank Capital Adequacy, Deposit Insurance and Security Values, Part I

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  • William F. Sharpe

Abstract

This paper provides a formal setting for the analysis of the capital adequacy of an institution with deposits insured by a third party. An insured depositor has a claim against the institution and a contingent claim against the insurer. This paper analyzes the effect of the riskiness of the asset mix and the relative amount of deposits and capital on the potential liability of the insurer. It shows that an increase in asset risk, holding value constant, increases the value of equity and raises the potential liability of the insurer.

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File URL: http://www.nber.org/papers/w0209.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0209.

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Date of creation: Oct 1977
Date of revision:
Publication status: published as JFQA, Vol. 13, no. 4 (1978): 701-718.
Handle: RePEc:nbr:nberwo:0209

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Cited by:
  1. 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.
  2. Demirguc-Kunt, Asli, 1992. "Creditor country regulations and commercial bank lending to developing countries," Policy Research Working Paper Series 917, The World Bank.
  3. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia.
  4. John H. Boyd & Stanley L. Graham, 1988. "The profitability and risk effects of allowing bank holding companies to merge with other financial firms: a simulation study," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20.
  5. Stéphanie Stolz, 2002. "The Relationship between Bank Capital, Risk-Taking, and Capital Regulation: A Review of the Literature," Kiel Working Papers 1105, Kiel Institute for the World Economy.
  6. John H. Boyd & Stanley L. Graham, 1986. "Risk, regulation, and bank holding company expansion into nonbanking," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-17.
  7. Avery, Robert B. & Berger, Allen N., 1991. "Risk-based capital and deposit insurance reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 847-874, September.
  8. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
  9. Gary Gorton & Andrew Winton, 1995. "Bank Capital Regulation in General Equilibrium," NBER Working Papers 5244, National Bureau of Economic Research, Inc.
  10. Javier Suárez, 1998. "Risk-taking and the prudential regulation of banks," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 307-336, September.
  11. Frank Heid & Daniel Porath & Stéphanie Stolz, 2003. "Does Capital Regulation Matter for Bank Behavior? Evidence for German savings banks," Kiel Working Papers 1192, Kiel Institute for the World Economy.
  12. Richard W. Kopcke, 2000. "Deposit insurance, capital requirements, and financial stability," Working Papers 00-3, Federal Reserve Bank of Boston.
  13. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Bank concentration and crises," Policy Research Working Paper Series 3041, The World Bank.
  14. Asli Demirgüç-Kunt, 1991. "On the valuation of deposit institutions," Working Paper 9104, Federal Reserve Bank of Cleveland.
  15. Diwan, Ishac & Demirguc-Kunt, Asli, 1990. "The menu approach to developing country external debt : an analysis of commercial banks'choice behavior," Policy Research Working Paper Series 530, The World Bank.
  16. Xiaozhong Liang, 2005. "The Behavior of Banks under the Deposit Insurance and Capital Requirements," Computing in Economics and Finance 2005 407, Society for Computational Economics.
  17. Vittas, Dimitri & Demirguc-Kunt, Asli & Musalem, Alberto, 1993. "North American free trade agreement : issues on trade in financial services for Mexico," Policy Research Working Paper Series 1153, The World Bank.
  18. Weber, Martin & Kleff, Volker, 2003. "How Do Banks Determine Capital? Empirical Evidence for Germany," ZEW Discussion Papers 03-66, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  19. Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.

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