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Risk Adjusted Deposit Insurance for Japanese Banks

Listed author(s):
  • Ryuzo Sato
  • Rama V. Ramachandran
  • Bohyong Kang
Registered author(s):

    The purpose of this paper is to evaluate the Japanese deposit insurance scheme by contrasting the flat insurance rate with a market-determined risk-adjusted rate. The model used to calculate the risk-adjusted rate is that of Ronn and Verrna (1986) . It utilizes the notion of Merton(1977) that the deposit insurance can be based on a one-to-one relation between it and the put option; this permits the application of Black and Scholes(1973) model for the calculation of the insurance rate. The risk adjusted premiums are calculated for the thirteen city banks and twenty-two regional banks. The inter-bank spread in risk-adjusted rates in Japan is found to be as wide as in the United States. But the insurance system is only one component of the safety network for a county's banking system. The difference in the American and Japanese networks is described and its implications for the evaluation of the insurance system is discussed.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3314.

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    Date of creation: Apr 1990
    Publication status: published as Sato, Ryuzo (ed.) The selected essays of Ryuzo Sato. Volume 2. Production, stability and dynamic symmetry, Economists of the Twentieth Century series. Cheltenham, U.K. and Northampton, MA: Elgar, 1999.
    Handle: RePEc:nbr:nberwo:3314
    Note: ME
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    1. Diamond, Douglas W & Dybvig, Philip H, 1986. "Banking Theory, Deposit Insurance, and Bank Regulation," The Journal of Business, University of Chicago Press, vol. 59(1), pages 55-68, January.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Ian S. McCarthy, 1980. "Deposit Insurance: Theory and Practice (L'assurance des dépôts bancaires: théorie et pratique) (Seguro de depósitos: Teoría y práctica)," IMF Staff Papers, Palgrave Macmillan, vol. 27(3), pages 578-600, September.
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