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Market Valuation of Bank Assets and Deposit Insurance in Canada

Author

Listed:
  • Ronald Giammarino
  • Eduardo Schwartz
  • Josef Zechner

Abstract

The authors examine a sample of Canadian banks and use option pricing theory to infer the market value of a bank's assets from the observed market value and volatility of its equity. They find that market value estimates are significantly different from corresponding book values. These differences vary significantly across banks, suggesting that market values provide bank-specific information not found in book values. They also derive the risk-adjusted deposit insurance premia for these banks. The results suggest that the current flat-rate deposit insurance premium system has resulted in significant cross subsidization among banks.

Suggested Citation

  • Ronald Giammarino & Eduardo Schwartz & Josef Zechner, 1989. "Market Valuation of Bank Assets and Deposit Insurance in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 109-127, February.
  • Handle: RePEc:cje:issued:v:22:y:1989:i:1:p:109-27
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    Citations

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    Cited by:

    1. James Barth & Philip Bartholomew & Peter Elmer, 1997. "The value of tax benefits and the cost of liquidating versus selling failed thrift institutions," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 21(2), pages 3-11, June.
    2. Klaus P. Fischer & Jean-Pierre Gueyie & Edgar Ortiz, 1997. "Financial Liberalization: Commercial Bank's Blessing or Curse?," Finance 9705003, EconWPA.
    3. Butler, J. S. & Schachter, Barry, 1996. "The statistical properties of parameters inferred from the black-scholes formula," International Review of Financial Analysis, Elsevier, vol. 5(3), pages 223-235.
    4. Grira, Jocelyn & Hassan, M. Kabir & Soumaré, Issouf, 2016. "Pricing beliefs: Empirical evidence from the implied cost of deposit insurance for Islamic banks," Economic Modelling, Elsevier, vol. 55(C), pages 152-168.
    5. Brahim Guizani & Wako Watanabe, 2010. "The Deposit Insurance and the Risk-Shifting Incentive Evidence from the Blanket Deposit Insurance in Japan," Keio/Kyoto Joint Global COE Discussion Paper Series 2010-004, Keio/Kyoto Joint Global COE Program.
    6. Sinha, Pankaj & Sharma, Sakshi & Sondhi, Kriti, 2013. "Market Valuation and Risk Assessment of Indian Banks using Black -Scholes -Merton Model," MPRA Paper 47442, University Library of Munich, Germany.
    7. Atkeson, Andrew G. & Eisfeldt, Andrea L. & Weill, Pierre-Olivier, 2017. "Measuring the financial soundness of U.S. firms, 1926–2012," Research in Economics, Elsevier, vol. 71(3), pages 613-635.
    8. Guidara, Alaa & Lai, Van Son & Soumaré, Issouf & Tchana, Fulbert Tchana, 2013. "Banks’ capital buffer, risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3373-3387.
    9. Christian Braun, 2001. "The cost of a guarantee for bank liabilities: revisiting Merton," BIS Papers chapters,in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 354-366 Bank for International Settlements.
    10. Cordell, Lawrence R. & King, Kathleen Kuester, 1995. "A market evaluation of the risk-based capital standards for the U.S. financial system," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 531-562, June.
    11. Jin-Chuan, Duan & Moreau, Arthur F. & Sealey, C. W., 1995. "Deposit insurance and bank interest rate risk: Pricing and regulatory implications," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 1091-1108, September.
    12. Liu, Ying & Papakirykos, Eli & Yuan, Mingwei, 2006. "Market Valuation and Risk Assessment of Canadian Banks," Review of Applied Economics, Review of Applied Economics, vol. 2(1).
    13. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Systemically important banks: an analysis for the European banking system," International Economics and Economic Policy, Springer, vol. 3(1), pages 73-89, April.
    14. Luc Laeven, 2004. "The Political Economy of Deposit Insurance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(3), pages 201-224, December.
    15. Demirgüç-Kunt, Asli & Kane, Edward J. & Laeven, Luc, 2008. "Determinants of deposit-insurance adoption and design," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 407-438, July.
    16. Gueyie, Jean-Pierre & Lai, Van Son, 2003. "Bank moral hazard and the introduction of official deposit insurance in Canada," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 247-273.
    17. Dermine, Jean & Lajeri, Fatma, 2001. "Credit risk and the deposit insurance premium: a note," Journal of Economics and Business, Elsevier, vol. 53(5), pages 497-508.
    18. Epps, T. W. & Pulley, Lawrence B. & Humphrey, David B., 1996. "Assessing the FDIC's premium and examination policies using 'Soviet' put options," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 699-721, May.
    19. Flannery, Mark J. & Giacomini, Emanuela, 2015. "Maintaining adequate bank capital: An empirical analysis of the supervision of European banks," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 236-249.
    20. Guizani, Brahim & Watanabe, Wako, 2016. "The effects of public capital infusions on banks’ risk-shifting to the deposit insurance system in Japan," Journal of Financial Stability, Elsevier, vol. 26(C), pages 15-30.
    21. Loveland, Robert, 2016. "How prompt was regulatory corrective action during the financial crisis?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 16-36.
    22. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
    23. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    24. Pennacchi, George G., 2005. "Risk-based capital standards, deposit insurance, and procyclicality," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 432-465, October.
    25. Duan, J. & Sealey, C. W. & Yan, Y., 1999. "Managing banks' duration gaps when interest rates are stochastic and equity has limited liability," International Review of Economics & Finance, Elsevier, vol. 8(3), pages 253-265, September.

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