Abstract
The paper develops a model for determining a risk-adjusted insurance premium to be charged by the FDIC. The proposed model is an alternative to models based on the option pricing formula and introduces coinsurance and deductible clauses for deposit insurance. The resulting risk-sensitive insurance premium is: (1) an increasing function of the interest rate paid on a bank's deposits, the bank's loan—loss rate, the bank's deposit-to-capital ratio, and the expenses incurred by the FDIC and the insured bank; and (2) a decreasing function of the interest rate earned on the bank's loans and the rate of return on the FDIC's investments. The models with coinsurance and deductibles reduce the FDIC's liabilities and result in smaller insurance premiums than the full insurance model. A risk-adjusted insurance premium would encourage bankers and depositors discipline reducing the moral hazard problem existing under the current flat insurance premium.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
