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Pricing Full Deposit Insurance in Germany amidst the Financial Crisis 2008-2010

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Author Info

  • Markus R. Kosters

    (School of Business and Economics, Maastricht University)

  • Stefan T.M. Streatmans

    (Maastricht research school of Economics of Technology and Organizations)

  • Mario Maggi

    (Department of Economics and Quantitative Methods, University of Pavia)

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    Abstract

    This paper investigates the pricing of full deposit insurance in Germany in the context of its political promise by the German government. We implement the characteristics of the mutual guarantee framework of German banks and the specifics of the German deposit insurance system into a Monte Carlo model. The analysis suggests that banks have an incentive to increase their riskiness if they do not have to bear the fair value of the insurance costs of their deposits. On the other hand, the government should incentivise banks to reduce their size and become more specialized to achieve better diversification in the German banking landscape.

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    File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q143.pdf
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    Bibliographic Info

    Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 143.

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    Length: 23 pages
    Date of creation: May 2011
    Date of revision:
    Handle: RePEc:pav:wpaper:143

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    Related research

    Keywords: Asset pricing; financial crisis; deposit insurance; mutual guarantee framework;

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    References

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    1. G. G. Garcia, 1999. "Deposit Insurance," IMF Working Papers 99/54, International Monetary Fund.
    2. 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.
    3. Allen, Linda & Saunders, Anthony, 1993. "Forbearance and valuation of deposit insurance as a callable put," Journal of Banking & Finance, Elsevier, vol. 17(4), pages 629-643, June.
    4. De Giuli, Maria Elena & Maggi, Mario Alessandro & Paris, Francesco Maria, 2009. "Deposit guarantee evaluation and incentives analysis in a mutual guarantee system," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1058-1068, June.
    5. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
    7. Merton, Robert C., 1977. "On the cost of deposit insurance when there are surveillance costs," Working papers 903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Kendall, Sarah B. & Levonian, Mark E., 1991. "A simple approach to better deposit insurance pricing," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 999-1018, September.
    9. Edward J. Kane & Asli Demirguc-Kunt, 2001. "Deposit Insurance Around the Globe: Where Does it Work?," NBER Working Papers 8493, National Bureau of Economic Research, Inc.
    10. Schellhorn, Carolin D. & Spellman, Lewis J., 1996. "Subordinated debt prices and forward-looking estimates of bank asset volatility," Journal of Economics and Business, Elsevier, vol. 48(4), pages 337-347, October.
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