Determining the Target Deposit Insurance Fund: Practical Approaches for DataaPoor Deposit Insurers

Abstract

In order for deposit insurers to be able to maintain public confidence following a bank failure, they must be able to act quickly to repay depositors and adequately fund the resolution of failed institutions. According to the International Association of Deposit Insurers, the best measure of deposit insurer funding adequacy is the Target Fund Ratio, the deposit insurance fund divided by total insured deposits, and each countries fund target will vary based on institutional needs. This paper presents a framework to assist countries, especially data-poor ones, in developing such a funding target. The paper employs a simulation approach that combines probability of default, loss given default, default correlation, and exposure at default to yield Target Fund Ratios required for the deposit insurer to remain solvent across a variety of different economic environments. This paper then uses the U.S. as an example country and compares results of the method to U.S. experiences and policy decisions.