Deposit Insurance Fund Research Articles

The Safety and Soundness Effects of Bank M&As in the EU: Does Prudential Regulation Have Any Impact?

This paper studies the impact of European bank mergers and acquisitions on changes in key safety and soundness measures of both acquirers and targets. We find that capitalization, profitability and liquidity show signs of statistically and economically significant mean reversion for acquirers. Also, acquirers in cross-border deals tended to perform better when their home country prudential supervisors and deposit insurance funding systems were stricter than the target‘s. For target banks, the most consistent findings from the cross-sectional regressions are that stronger supervision and tougher deposit insurance funding regimes tend to result in positive post-merger changes in liquidity and performance.

A European Deposit Insurance and Resolution Fund

A European Deposit Insurance and Resolution Fund

Moving FDIC insurance to an asset-based assessment system: Evidence from the special assessment of 2009

In the second quarter of 2009, the FDIC imposed a special assessment on insured banks to replenish the deposit insurance fund. While the traditional assessment base for regular deposit insurance premiums was all insured deposits, the special assessment was applied to a bank's total assets minus Tier 1 capital (total liabilities), with the maximum ‘capped’ at 10 basis points of insured deposits. We find that the cap yielded the greatest savings for banks with assets above $10 billion and that the FDIC would have raised a substantially greater amount of funds using holding company adjusted assets or could have applied a lower assessment rate to collect the same amount of proceeds.

Moving FDIC Insurance to an Asset-Based System: Evidence from the Special Assessment of 2009

In the second quarter of 2009, the FDIC imposed a special assessment on insured banks to replenish the deposit insurance fund. While the traditional assessment base for regular deposit insurance premiums was all insured deposits, the special assessment was applied to a bank’s total assets minus Tier 1 capital (total liabilities), with the maximum ‘capped’ at 10 basis points of insured deposits. We find that the cap yielded the greatest savings for banks with assets above $10 billion and that the FDIC would have raised a substantially greater amount of funds using holding company adjusted assets or could have applied a lower assessment rate to collect the same amount of proceeds.

Sweden: 2011 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Sweden

In this study, economic developments and policies used for the recovery of financial stability of Sweden against global recession are discussed. The low inflation is reached by increasing Riksbank policy rate. The role of fiscal policy council is explained. The Financial Sector Assessment Program (FSAP) recommendations are endorsed on financial institutions. These include merging the stability and deposit insurance funds, establishing a special bank resolution regime, and increasing further the Financial Supervisory Agency’s capacity. Also, the Basel III capital regulations are supported by the authorities.

Crisis Management and Resolution for a European Banking System

This paper proposes an integrated crisis management and resolution framework for the EU's single banking market. It comprises a European Resolution Authority (ERA), armed with the mandate and the tools to deal cost-effectively with failing systemic cross-border banks, and is designed to address many fundamental operational and incentive problems. It also seeks to reduce moral hazard and better protect countries against the risk of twin fiscal-financial crises by detaching banks from government budgets. The ERA would be most effective if it were twinned or combined with a European Deposit Insurance and Resolution Fund

Could Efficiency Analysis Help in Predicting Bank Failure? The Case of the 2001 Turkish Crisis

Inefficient, or weak banks, are continuously pointed out as threatening financial stability as they are more likely to fail than efficient ones and thus to weaken the whole banking sector (BIS, 2002). Consequently, banks' efficiency analysis, a measure of bank's management efficiency, should be a useful tool for policy makers to predict bank failure. This paper tests the usefulness of efficiency analysis in predicting bank failure by using the 2001 Turkish banking crisis as a case study. It implements in a first step both parametric, stochastic frontier analysis (SFA), and non-parametric, data envelopment analysis (DEA), to predict Turkish banks' efficiency scores over 1996 to 2001. During this period, 19 out of 55 were taken over by the Turkish Saving and Deposit Insurance Fund (SDIF). In a second step, efficiency scores are tested against the standard CAMELS model to check their capacity in predicting banks' probability to fail, i.e., SDIF taken-over. The findings indicate that banks taken-over were less cost efficient than others. Moreover, banks which were lending to connected parties were also less cost efficient than others. On the methodology side, our results using a parametric approach are found to be more significant than the non-parametric ones.

Crisis Management and Resolution for a European Banking System

This paper proposes an integrated crisis management and resolution framework for the EU's single banking market. It comprises a European Resolution Authority (ERA), armed with the mandate and the tools to deal cost-effectively with failing systemic cross-border banks, and is designed to address many fundamental operational and incentive problems. It also seeks to reduce moral hazard and better protect countries against the risk of twin fiscal-financial crises by detaching banks from government budgets. The ERA would be most effective if it were twinned or combined with a European Deposit Insurance and Resolution Fund

: (Estimating Deposit Insurance Fund in Korean Banking Industry)

Korean Abstract: 본 논문은 예금보험기금을 예상손실을 충당하기 위한 준비금 개념으로 이해하는 것이 예금보험제도의 특수성을 감안할 때 합리적일 수 있음을 주장하고, 예상손실 개념에 따라 예금보험기금을 추정하고 이 과정에서 고려할 몇 가지 추정 상의 이슈를 검토하였다. 우선 예금보험기금의 익스포저는 부보예금보다 총부채 개념을 사용하여 익스포저와 정리방식과의 연계를 강화였으며 손실률 역시 외환위기 이후 부실은행의 경험손실률을 추정하여 사용하였다. 부도율은 EDF모형을 사용하되, 은행의 특수성을 감안하고 신용위험의 fat-tail 특성을 감안한 분포를 가정하여 추정하였다. 그 결과, 예상손실에 따른 예금보험기금은 부보예금의 1.3%로 추정되어 예상외손실을 포함한 선행연구들과 유사한 결과를 보였는데, 이는 주로 익스포저의 차이에서 기인한 것으로 나타났다. English Abstract: This paper estimates deposit insurance funds in the Korean banking industry using the expected loss methodology. This paper argues that estimating the fund by employing the credit risk model is not proper in light of the definition of deposit insurance fund. Deposit insurance having any paid-in capital covers just as much as the expected losses from failed financial institutions while government as an ultimate risk-absorber covers the unexpected losses. In estimating expected loss, this paper revises the EDF model to capture the characteristics of commercial banks and fat-tail characteristics of credit loss. The deposit insurance fund is estimated at about 1.3 % of total insured deposits. This happens to be a similar estimate in comparison with that of earlier research using the credit risk model. The similarity stems from the difference in definition of exposures at risk between the two approaches.

Deposit Insurance, Risk-Taking and Banking Crises: Is there a Risk-Minimizing Level of Deposit Insurance Coverage?

Explicit deposit insurance is a two-edged sword with respect to risk taking. High explicit coverage creates incentives to shift risk to a deposit insurance fund or taxpayers; low explicit coverage may be associated with strong implicit insurance reflecting lack of credibility of non-insurance. Institutions that allow banks to fail without serious contagion effects enhance this credibility. Alternative measures of banks' risk taking are used to test the hypothesis expressed as a U-shaped relationship between explicit coverage and risk taking. The hypothesis is strongly supported when the occurrence of banking crises and non-performing loans are proxies for risk-taking in a country's banking system. Institutional characteristics affect the relation between explicit coverage and risk-taking.

Loss Sharing Rules for Bank Holding Companies: An Assessment of the Federal Reserve's Source‐of‐Strength Policy and the FDIC's Cross Guarantee Authority

In this article, we critically examine two policies designed to protect the deposit insurance funds—the Federal Reserve Board's source‐of‐strength policy and the FDIC's cross‐guarantee authority. We discuss why each of the policies was adopted and how effective each has been in practice since its implementation. We then evaluate the future application and usefulness of the two policies in light of the structural changes that have resulted from industry consolidation and the financial modernization of the 1990s.

Predicting bank financial failures using neural networks, support vector machines and multivariate statistical methods: A comparative analysis in the sample of savings deposit insurance fund (SDIF) transferred banks in Turkey

Bank failures threaten the economic system as a whole. Therefore, predicting bank financial failures is crucial to prevent and/or lessen the incoming negative effects on the economic system. This is originally a classification problem to categorize banks as healthy or non-healthy ones. This study aims to apply various neural network techniques, support vector machines and multivariate statistical methods to the bank failure prediction problem in a Turkish case, and to present a comprehensive computational comparison of the classification performances of the techniques tested. Twenty financial ratios with six feature groups including capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk (CAMELS) are selected as predictor variables in the study. Four different data sets with different characteristics are developed using official financial data to improve the prediction performance. Each data set is also divided into training and validation sets. In the category of neural networks, four different architectures namely multi-layer perceptron, competitive learning, self-organizing map and learning vector quantization are employed. The multivariate statistical methods; multivariate discriminant analysis, k-means cluster analysis and logistic regression analysis are tested. Experimental results are evaluated with respect to the correct accuracy performance of techniques. Results show that multi-layer perceptron and learning vector quantization can be considered as the most successful models in predicting the financial failure of banks.

Loss Sharing Rules for Bank Holding Companies: An Assessment of the Federal Reserve's Source-of-Strength Policy and the FDIC's Cross Guarantee Authority

In this article, we critically examine two policies designed to protect the deposit insurance funds - the Federal Reserve Board's source-of-strength policy and the FDIC's cross-guarantee authority. We discuss why each of the policies was adopted and how effective each has been in practice since its implementation. We then evaluate the future application and usefulness of the two policies in light of the structural changes that have resulted from industry consolidation and the financial modernization of the 1990s.

A Deposit Insurance System for Armenia

We provide an overview of the design for a system of official deposit guarantees for the Republic of Armenia. This proposed design takes into consideration the overall structure of the Armenian economy, its official institutions and the financial system. Furthermore, we outline specific design features for the Armenian deposit insurance system that are consistent with the social welfare objectives that underpin arguments for its adoption, while minimizing the distortions of these government guarantees on incentives. Key among the design features are limited coverage of deposits, separation of deposit insurance from central banking, and extended liability of banks for losses incurred by the deposit insurance fund.

(Bank Consolidation and the Soundness of the Deposit Insurance Fund)

Korean Abstract: 외환위기 이후 우리나라 은행시장에서는 부실은행 정리를 통한 합병으로 대형화가 급진전되었다. 이에 따라 시장집중도가 크게 증가하였으며, 소수의 대형화된 은행들이 그룹화 되면서 편중위험증대로 금융산업 전체의 시스템위험(Systemic Risk)이 고조되는데 대한 우려의 목소리도 높아졌다. 본고에서는 은행대형화가 은행산업의 위험수준에 미치는 영향과 예금보험기금 건전성에 미치는 효과를 분석하였다. 이를 통해 예금보험기금의 건전성 제고방안을 제시하고자 하였다. 실증연구에서는 패널회귀분석 및 J.P. Morgan의 Credit Metrics와 KMV의 예상부도확률(EDF)모형을 활용하였다. 회귀분석결과, 은행대형화는 금융기관의 안정성에 전반적으로 부정적인 영향을 미치는 것으로 나타났다. 초대형은행의 출현으로 인해 시스템위기 발생가능성이 증대된 것과 대마불사(大馬不死)에 대한 기대감으로 인해 은행들의 안정성 관리가 소홀해 질 수 있다는 점을 고려하면 이에 대한 금융감독당국의 감시역할강화가 필요하다고 본다. 반면, 겸업화는 은행의 안정성에 기여하는 긍정적인 영향을 주는 것으로 나타나 이에 대한 정책적 지원이 필요할 것으로 보인다. 은행대형화의 정도와 시스템위험수준이 상이한 3개 연도(1996, 2000, 2006)를 중심으로 산출한 손실분포로부터 적정예금보험기금을 추정한 결과, 경쟁은행의 수가 많았던 1996년에 비하여 대형화가 급진전되고 국가신용등급이 낮았던 2000년도에는 부보예금대비 예금보험기금 비율이 높아진 것으로 나타났다. 한편 국내은행시장의 구조를 크게 변화시킬 수 있는 외환은행의 타 국내은행 매각 시나리오에서는 대형화의 심화로 인해 대부분의 시나리오에서 금융안정성 확보를 위해 보험기금 축적비율이 증대되어야 하는 것으로 나타났다. 따라서 전반적으로 은행대형화는 예금보험기금의 건전성을 저해하는 것으로 보인다. 본 연구의 국내외 문헌연구와 실증결과를 통해 대형화에 따른 예금보험기금의 건전성제고 방안을 다음과 같이 고려해 볼 수 있다. 첫째, 시스템위험이 명시적으로 정의되어 적시에 정책 당국간의 협력이 이루어져 야할것이다. 전 세계적인 금융의 대형화추세로 시스템위험의 발생가능성이 증대되어 주요국들은 현재 효율적 관리체제를 구축해 나가고 있고 우리도 이에 부응해야 할 것이다. 둘째, 대형화가 더욱 진전됨에 따라 목표기금비율을 증대시킬 필요가 있다. 본고의 실증결과도 시사하듯이 다른 조건이 같을 때에 대형화와 그에 따른 경쟁은행의 축소는 은행파산에 따른 손실액의 증가를 초래하기 때문이다. 셋째, 금융그룹화가 급진전되면서 계열은행을 중심으로 계열사 간손실의 분담을 제도화해야 할 것이다. 특히 금융그룹내의 은행이 대형화를 통해 경쟁력을 높일 뿐만 아니라 위험분산을 위한 겸업화 등 다른 경영전략수단을 잘 활용하도록 유도해야 할 것이다. English Abstract: This paper examines how bank consolidation affects the soundness of deposit insurance fund. After the onset of the financial crisis, the concentration ratio in the banking industry has increased rapidly as Korea experienced the merger wave in a way to restructure the troubled banking institutions. Along with the trend in bank consolidation, there has been growing concern on the possibility of the outbreak of the systemic crisis triggered by a single mega-bank. We investigate the relationship between bank consolidation and systemic risk utilizing panel regressions and the EDF(Expect Default Frequency) model based on CreditMetrics by J.P. Morgan. Our empirical results show that the financial healthiness of a bank deteriorates as the bank size gets larger. Furthermore, Our Monte Carlo simulation results report that bank consolidation requires accumulation of more deposit insurance fund due to the increased level of systemic risk. In conclusion, our findings suggest that bank consolidation turns out to have some significant adverse effects on the bank risk level and on the soundness of deposit insurance fund.

Systém pojištění vkladů v České republice: historie, současný stav a porovnání s Evropskou unií

Czech laws on Deposit Guarantee-Schemes are characterized. It is described history of rise of the Czech Deposit Insurance Fund and dynamics of its basic characteristics. Czech deposit guarantee system is compared with the European system and with the European Directive on Deposit Guarantee-Schemes. It is calculated the effective rate of "taxation" by the compulsory payment to Czech Deposit Insurance Fund, which is (because of the very low interest rates in the Czech Republic) extremely high (about 30-40 %). Recommendations: 1) discard the audited firms from the Deposit Guarantee-Scheme and 2) decrease the amounts compulsorily paid by banks for deposits of small clients (deposits of households).

A Study on the risk change of the banking industry under deposit insurance funding policy

A Study on the risk change of the banking industry under deposit insurance funding policy

An Analytical Model for the FDIC Deposit Insurance Premium

The Federal Deposit Insurance Corporation (FDIC) is moving towards charging risk-based deposit insurance premium. Since it insures bank deposits, the FDIC is exposed to the counter-party credit risk, that is, the FDIC may suffer losses when one or more insured institutions default. This paper presents a framework for determining the deposit insurance premium based on the credit risk an insured institution imposes on the FDIC. In this framework, an analytical model within the asymptotic single risk factor framework is first developed to determine the appropriate size of the deposit insurance funds. The main drivers are each insured institution's probability of default, insured deposits, liability structure, asset correlation between the institutions, asset severity and the probability the total deposit insurance funds are adequate to cover the losses during a given period. The premium is then determined by this target deposit insurance fund and the funds already in place. This framework is timely from three perspectives. First, it enables the FDIC to calibrate the target ratios of the deposit insurance fund to levels of confidence and to see if this is what the US Congress had in mind in terms of how remote they would want the chances of deposit insurance fund running out. Second, the framework provides a benchmark for sanity check for premium being charged to an individual bank or a group of similar banks. Third, some details of the FDIC proposals are still to be parameterized. The results of the model may help the FDIC in honing down those parameters.

Deposit Insurance, the New Basel Accord and the Risk-Taking Behavior of Banks

This paper analyzes the new Basel Accord abilities to reduce the externalities that result from the underpriced deposit insurance. A moral hazard framework is adopted to describe the optimal behavior of banks that endogenously select the characteristics of their credit portfolio in order to maximize the benefit from subsidized insured deposits. Our results show that the New Basel Accord will add to bank stability and hence will reduce the loss exposure of the deposit insurance fund. Finer risk differentiation of the capital requirements yields a major advantage: the informational content of the regulatory capital allows the supervisors to identify with ease the risky banks.

(Estimating the Risk in the Banking Industry)

Korean Abstract: 은행산업의 부실위험을 사전에 포착하고 감독하는 일은 금융위기를 방지하고 금융산업의 안정성을 높이는데 핵심적인 과제이다. 본 연구는 은행의 주식가격 정보를 이용하여 은행산업의 위험도를 측정하고자 한다. 이와 관련된 기존의 연구들이 개별 은행의 위험에 초점을 맞춘 것과 달리 우리는 은행산업 전체의 위험도를 측정한다는데 특징이 있다. 이를 위해 은행들의 개별 부도확률은 물론, 은행들이 동시에 파산할 확률인 결합부도확률을 추정한다. 또 이들 부도확률을 이용하여 은행산업 전체 차원에서 손실분포의 평균과 표준편차를 구하여 이를 은행산업체의 위험도를 나타내는 지표로 삼아 분석한다. 본 연구에서 제시한 모형을 이용하여 1997년 IMF사태를 전후로 우리나라 은행산업의 위험도를 추정한 결과, 1996년 하반기 시점에서 은행산업의 부실위험이 급상승한 것으로 나타났다. 이는 주식시장의 정보가 은행산업의 위험도를 사전 예측하는데 유용하다는 것을 의미함과 동시에, 우리의 모형이 은행산업의 조기경보 모형으로 활용될 수 있다는 것을 시사한다. English Abstract: The key to preventing financial crisis and enhancing stability in the banking system lies in the accurate and timely monitoring of risk. With the use of equity market information, this paper aims to propose an empirical forecasting model that assesses the risk in the banking industry. Contrary to previous studies which tend to focus on individual bank failures, an effort has been made to forecast the risk of the banking industry as a whole. By looking at individual as well as the joint default probabilities, the mean and standard deviation of loss distribution on the deposit insurance fund are estimated - this we regard as a measure representing the risk in the banking industry. Using the model provided, we conduct estimations of the risk in Korea's banking industry for the period leading up to and following the financial crisis of 1997. The findings show that a dramatic increase in risk from the latter half of 1996. This seems to imply that equity market information can be useful in predicting the risk in the banking industry, and that our model can serve as an early-warning model in monitoring the banking industry.