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Risk Adjusted Deposit Insurance for Japanese Banks

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  • Ryuzo Sato
  • Rama V. Ramachandran
  • Bohyong Kang
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    Abstract

    The 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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    File URL: http://www.nber.org/papers/w3314.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3314.

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    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.
    Handle: RePEc:nbr:nberwo:3314

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. Diamond, Douglas W & Dybvig, Philip H, 1986. "Banking Theory, Deposit Insurance, and Bank Regulation," The Journal of Business, University of Chicago Press, vol. 59(1), pages 55-68, January.
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    Cited by:
    1. Christophe Morel, 2000. "Deposit Insurance as a Tool for Banking Supervision," Revue d'Économie Financière, Programme National Persée, vol. 60(5), pages 233-244.
    2. 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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