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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.

Suggested Citation

  • William F. Sharpe, 1977. "Bank Capital Adequacy, Deposit Insurance and Security Values, Part I," NBER Working Papers 0209, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0209
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    Cited by:

    1. 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.
    2. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia.
    3. Demirguc-Kunt, Asli, 1992. "Creditor country regulations and commercial bank lending to developing countries," Policy Research Working Paper Series 917, The World Bank.
    4. John H. Boyd & Stanley L. Graham, 1986. "Risk, regulation, and bank holding company expansion into nonbanking," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 10(Spr), pages 2-17.
    5. Weber, Martin & Kleff, Volker, 2003. "How Do Banks Determine Capital? Empirical Evidence for Germany," ZEW Discussion Papers 03-66, ZEW - Leibniz Centre for European Economic Research.
    6. 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.
    7. 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.
    8. 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, vol. 12(Spr), pages 3-20.
    9. 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.
    10. 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.
    11. Asli Demirgüč-Kunt, 1991. "On the valuation of deposit institutions," Working Papers (Old Series) 9104, Federal Reserve Bank of Cleveland.
    12. Richard W. Kopcke, 2000. "Deposit insurance, capital requirements, and financial stability," Working Papers 00-3, Federal Reserve Bank of Boston.
    13. Javier Suárez, 1998. "Risk-taking and the prudential regulation of banks," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 307-336, September.
    14. 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.
    15. Gary Gorton & Andrew Winton, "undated". "Bank Capital Regulation in General Equilibrium," Rodney L. White Center for Financial Research Working Papers 17-95, Wharton School Rodney L. White Center for Financial Research.
    16. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2003. "Bank Concentration and Crises," NBER Working Papers 9921, National Bureau of Economic Research, Inc.
    17. 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.

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