The Aggregate Cost of Deposit Insurance: A Multiperiod Analysis

Abstract

This paper extends the standard single-period model of deposit insurance to a mutliperiod setting. It incorporates a variety of features describing bank and regulator behavior, such as endogenous capital adjustments and regulatory forbearance. Budgetary costs of deposit insurance are found using contingent claims techniques. We show how the market value of a bank′s net worth, a critical input of the model, can be estimated using accounting cash flow data and information from aggregate bank stock prices. Using Call Report data on U.S. commercial banks, we provide empirical estimates of the aggregate cost of deposit insurance under alternative regulatory policies. Journal of Economic Literature Classification Numbers: G13, G21, G28, H61.