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The changing role of banks and the changing value of deposit guarantees

Author

Listed:
  • James B. Thompson
  • Peter H. Ritchken

    (Amherst College)

  • Ivilina Popova

Abstract

Using a model for pricing deposit guarantees that treats the bank's investments as a portfolio of default-free bonds and risky loans, the authors push back uncertainty to the level of the borrowing firm and thus are able to explore how factors like firm leverage, loan maturity, and correlation effects between the firm's assets and interest rates affect the value of deposit guarantees.

Suggested Citation

  • James B. Thompson & Peter H. Ritchken & Ivilina Popova, 1995. "The changing role of banks and the changing value of deposit guarantees," Working Papers (Old Series) 9502, Federal Reserve Bank of Cleveland, revised 1995.
  • Handle: RePEc:fip:fedcwp:9502
    as

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    References listed on IDEAS

    as
    1. Anlong Li & L. Sankarasubramanian & James B. Thomson & Peter H. Ritchken, 1993. "Regulatory taxes, investment, and financing decision for insured banks," Working Papers (Old Series) 9303, Federal Reserve Bank of Cleveland, revised 1993.
    2. Gorton, Gary & Rosen, Richard, 1995. " Corporate Control, Portfolio Choice, and the Decline of Banking," Journal of Finance, American Finance Association, vol. 50(5), pages 1377-1420, December.
    3. Ritchken, Peter & Thomson, James B. & DeGennaro, Ramon P. & Li, Anlong, 1993. "On flexibility, capital structure and investment decisions for the insured bank," Journal of Banking & Finance, Elsevier, vol. 17(6), pages 1133-1146, December.
    4. Boyle, Phelim P & Evnine, Jeremy & Gibbs, Stephen, 1989. "Numerical Evaluation of Multivariate Contingent Claims," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 241-250.
    5. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    6. Mark Gertler & John H. Boyd, 1994. "Are banks dead? Or are the reports greatly exaggerated?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue sum, pages 2-23.
    7. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
    8. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, vol. 51(3), pages 439-452, July.
    9. 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.
    10. J. Huston McCulloch, 1978. "Interest Rate Risk and Capital Adequacy For Traditional Banks and Financial Intermediaries," NBER Working Papers 0237, National Bureau of Economic Research, Inc.
    11. Crouhy, Michel & Galai, Dan, 1991. "A contingent claim analysis of a regulated depository institution," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 73-90, February.
    12. Klaus Bjerre Toft., 1994. "Exact Formulas for Expected Hedging Error and Transactions Costs in Option Replication," Research Program in Finance Working Papers RPF-237, University of California at Berkeley.
    13. McCulloch, J. Huston, 1981. "Misintermediation and macroeconomic fluctuations," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 103-115.
    14. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
    15. Flannery, Mark J., 1989. "Capital regulation and insured banks choice of individual loan default risks," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 235-258, September.
    16. Mark D. Flood, 1990. "On the use of option pricing models to analyze deposit insurance," Review, Federal Reserve Bank of St. Louis, issue jan, pages 19-35.
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    Citations

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    Cited by:

    1. Stefan Nagel & Amiyatosh Purnanandam, 2019. "Bank risk dynamics and distance to default," CESifo Working Paper Series 7637, CESifo Group Munich.
    2. Stefan Nagel & Amiyatosh Purnanandam, 2019. "Bank Risk Dynamics and Distance to Default," NBER Working Papers 25807, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Bank loans; Deposit insurance;

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