The effect of subordinated debt and surety bonds on banks' cost of capital and on the value of federal deposit insurance
This paper examines two proposals to correct the risk-taking incentives embedded in the current deposit insurance system and to provide protection to the deposit insurance fund. the first would require banks to issue subordinated debt, and the second would require bank stockholders to post surety bonds. We use the cash-flow version of the Capital Asset Pricing Model to show how each proposal would affect the values and rates of return on uninsured deposits and equity. We then indicate the impact that each proposal would have on the values of the Federal Deposit insurance Corporation claim and on the bank, emphasizing the role of deposit insurance pricing.
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- Herbert L. Baer, 1985. "Private prices, public insurance: The pricing of federal deposit insurance," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 45-57.
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- Mark J. Flannery, 1989. "Pricing deposit insurance when the insurer measures risk with error," Proceedings 229, Federal Reserve Bank of Chicago.
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86-1, Board of Governors of the Federal Reserve System (U.S.).
- Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-211, May.
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