Abstract
This article uses Merton's deposit insurance pricing model to analyze ten depository institutions in Taiwan (Merton, R., 1977, Journal of Banking and Finance, 1, 3–11). A market-value-based maximum likelihood estimation method developed by Duan (Duan, J.-C., 1994, Mathematical Finance, 4, 155–167) is employed to compute the inputs needed for Merton's formula. Our findings indicate that these institutions were by and large heavily subsidized by the deposit insuring agency. By comparing the estimates obtained using the Ronn and Verma (1986) method, our results also raise a question as to the appropriateness of the Ronn and Verma method for deposit insurance pricing.
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