IDEAS home Printed from
   My bibliography  Save this article

Bank deposit insurance and business cycles: controlling the volatility of risk-based premiums


  • George Pennacchi


Proposals to make deposit insurance risk-based need to consider how premiums would fluctuate over the business cycle. This paper derives a new deposit insurance contract that has the following three features: 1) it is fairly priced in the sense that the insurer conveys no subsidy to the bank; 2) the insurance rate can be made as stable as desired by lengthening the "average" maturity of the contract; 3) the rate can be frequently updated as new information regarding the bank's financial condition is obtained. These characteristics are achieved with a contract that is a combination of several long-term ones whose contract intervals partially overlap. Relative to a standard, short-term contract, this "moving average" contract reduces the volatility of a bank's insurance rates and avoids payment of excessively high premiums during times of financial distress. ; Estimates of fair insurance rates under such a contract are presented for 42 banks based on data over the period 1987 to 1996. While lengthening the average maturity of the contract reduces the volatility of insurance rates, it also increases the average level of rates since the insurer requires a greater premium for systemic risk. The paper also finds that the distribution of fair insurance rates across banks is skewed, with most banks paying relatively low rates and a small minority of banks paying much higher ones.

Suggested Citation

  • George Pennacchi, 2002. "Bank deposit insurance and business cycles: controlling the volatility of risk-based premiums," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbcp:y:2002:x:3

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. G. G. Garcia, 2000. "Deposit Insurance; Actual and Good Practices," IMF Occasional Papers 197, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Andrew Kuritzkes & Til Schuermann & Scott Weiner, 2005. "Deposit Insurance and Risk Management of the U.S. Banking System: What is the Loss Distribution Faced by the FDIC?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(3), pages 217-242, September.
    2. Michael Falkenheim & George Pennacchi, 2003. "The Cost of Deposit Insurance for Privately Held Banks: A Market Comparable Approach," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(2), pages 121-148, October.

    More about this item


    Risk management ; Deposit insurance;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbcp:y:2002:x:3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.