Risk Adjusted Deposit Insurance for Japanese Banks
AbstractThe purpose of this paper is to evaluate the Japanese deposit insurance scheme by contrasting the flat insurance rate with a market-determined risk-adjusted rate. The model used to calculate the risk-adjusted rate is that of Ronn and Verrna (1986) . It utilizes the notion of Merton(1977) that the deposit insurance can be based on a one-to-one relation between it and the put option; this permits the application of Black and Scholes(1973) model for the calculation of the insurance rate. The risk adjusted premiums are calculated for the thirteen city banks and twenty-two regional banks. The inter-bank spread in risk-adjusted rates in Japan is found to be as wide as in the United States. But the insurance system is only one component of the safety network for a county's banking system. The difference in the American and Japanese networks is described and its implications for the evaluation of the insurance system is discussed.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3314.
Date of creation: Apr 1990
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Publication status: published as Sato, Ryuzo (ed.) The selected essays of Ryuzo Sato. Volume 2. Production, stability and dynamic symmetry, Economists of the Twentieth Century series. Cheltenham, U.K. and Northampton, MA: Elgar, 1999.
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- Ian S. McCarthy, 1980. "Deposit Insurance: Theory and Practice (L'assurance des dÃ©pÃ´ts bancaires: thÃ©orie et pratique) (Seguro de depÃ³sitos: TeorÃa y prÃ¡ctica)," IMF Staff Papers, Palgrave Macmillan, vol. 27(3), pages 578-600, September.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Diamond, Douglas W & Dybvig, Philip H, 1986. "Banking Theory, Deposit Insurance, and Bank Regulation," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(1), pages 55-68, January.
- Christophe Morel, 2000. "Deposit Insurance as a Tool for Banking Supervision," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 60(5), pages 233-244.
- Takatoshi Ito & Kimie Harada, 2003. "Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives," NBER Working Papers 9589, National Bureau of Economic Research, Inc.
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