Deposit Insurance Premium Research Articles

Неявное страхование вкладов в России после пандемии

Implicit deposit insurance is the name given to the cases when citizens prefer allocating deposits within banks with state (government) ownership when the deposit amount exceeds the limit covered by the state deposit insurance system. Implicit deposit insurance has already gained the focus of research attention in Russia, but during the times of pandemics and limited to deposits for the region of Moscow. The current study uses more up-to-date data of 2023-24 and extends the regional coverage to 25 regions of Russia. We evidence that the earlier found U-shaped dependence of the deposit rate premium and the state bank size was inverted. Moreover, we argue that during the times of rising key rate the heterogeneity of implicit deposit insurance premium though present became more homogeneous in terms of sign of the premium than during the times of relatively low-key rate.

Deposit Insurance Premiums and Bank Risk

AbstractDeposit insurance premiums impose costs on banks’ balance sheets, narrowing profit margins and inducing banks to “search for yield.” This paper estimates the effects of deposit insurance premiums on bank portfolio rebalancing using supervisory data and a kink in the insurance premium schedule. We show that deposit insurance premiums weaken banks’ demand for reserves (a liquid asset with no credit risk) and strengthen the supply of short-term interbank loans (a less liquid asset with credit risk). We discuss the implications of these findings for optimal deposit insurance pricing. (JEL G21, G28)

PERAN ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) TERHADAP PROFITABILITAS DI SEKTOR PERBANKAN INDONESIA

Environmental issues have encouraged various parties to carry out efforts to reduce the negative impacts that can arise from these issues that have the potential to hinder environmental sustainability. Business practices that focus on sustainability by incorporating environmental, social and governance aspects are becoming increasingly popular among companies, especially banks. This study aims to analyze the effects of ESG implementation proxied by Green Credit, Corporate Social Responsibility Fund, and Deposit Insurance Premium on bank profitability as measured by ROA (Return on Assets) in 2017-2021 using Bank Size proxied by Total Assets as a control variable. This study uses a quantitative approach by conducting panel data regression analysis to determine the simultaneous effect and partial effect of the independent variables on the dependent variable of the study. The results show that simultaneously all independent variables have a significant impact on bank profitability. Partially, the three ESG proxies have no significant effect on bank profitability, but the Bank Size has a positive impact on bank profitability.

Persistency of window dressing practices in the U.S. repo markets after the GFC: The unexplored role of the deposit insurance premium

AbstractWe investigate whether the regulatory improvements made in the aftermath of the global financial crisis have been effective in limiting bank downward window dressing by means of repos in the United States. We find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarter‐end. We also show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium.

The Procyclicality of FDIC Deposit Insurance Premiums

The Procyclicality of FDIC Deposit Insurance Premiums

대한민국 손해보험 비즈니스 예금보험료율 분석

Risk-based premium rate system has been adopted since 2014 for Korean deposit insurance to promote equity of rate making and to prevent moral hazard of financial institutions and they differentiate deposit insurance premium rate based upon business performance and financial condition of each insurance company. Setting 0.15% for standard deposit insurance premium rate for insurance business, they can scale up or down the final rate for each insurer within ±10%. It is controversial whether the current risk-based premium rate mechanism is good enough for promoting efficiency and equity of the Korean deposit insurance system. This study is to test efficiency and equity of the Korean deposit insurance system using the data of 4 major P&L insurance companies according to OPM(Option Pricing Model) analysis. Data analysis shows that the risk-based premium rates of all 4 companies are much lower than 0.15%, the current standard deposit insurance premium rate for insurance business. Inefficiently high deposit insurance premium rate is a serious problem causing too much reserving and business burden to insurance companies and eventually burden to insurance consumers. Also, the current risk-based premium rate mechanism is found not good enough to meet the goal of promoting equity of deposit insurance system.

Revisiting the valuation of deposit insurance

AbstractThis study proposes a framework for pricing deposit insurance that evaluates the effect of depositor preference laws and the issuance of contingent capital bonds. Four main findings emerge from this study. First, traditional option pricing models of deposit insurance overestimate insurance premiums. Second, only large issuances of contingent capital bonds decrease deposit insurance premiums under depositor preference. Third, the issuance of contingent capital bonds can partially offset banks' excessive risk‐taking caused by regulatory forbearance. Finally, although large banks have implied too‐big‐to‐fail risks, the deposit insurer's costs from large banks are not nearly as high as reported in previous studies.

Can the Indonesian banking industry benefit from a risk-based deposit insurance system?

ABSTRACT A risk-based premium scheme could be a reliable system to determine a fairer deposit insurance premium. This research aimed to assess Indonesian banks’ risk profile, including per size classification and ownership as well as to counterfactually simulate a risk-based deposit insurance system for the individual banks. This research combined analysis of variance (ANOVA) and non-parametric approach applied to 75 banks (2008q1-2019q3). The results showed that big banks did not necessarily posture better risk management compared to small banks. Also, under the risk-based scheme, banks with better risk management could be rewarded, while less prudent banks could be punished.

Determination of Deposit Insurance Premium (LPS): Merton’s Option Theory with Co-Insurance Consideration

Indonesia is a developing country that implements a deposit insurance system. Deposit Insurance Agency or LPS is an Indonesian deposit insurance established in 2004, which is Indonesian still unfamiliar with LPS, both among researchers, and the general public. Almost all deposit insurance in every country including Indonesia has the same problem, the problem is how to calculate premiums and how to avoid moral hazard by banks, therefore in this study will discuss how to determine premiums from the development of Black-Scholes option theory (1973) conducted by Merton (1977). To prevent banks from engaging in moral hazard, co-insurance is considered in this study, which is banks take the risk to anticipate 'excessive risk-taking' behavior. that occurs if the value of the asset is smaller than value of the deposit after joining the insurance program. So it is expected to encourage banks to beware.

Bank Regulation and Market Discipline in the Presence of Risk-Shifting Incentives

This paper presents a bank capital structure model in which equity holders can increase asset risk once debt is in place. I study the effects of capital requirements and subsidized deposit insurance on the bank's privately optimal funding and operational risk level. The model predicts that there are synergetic effects of regulation and market discipline. When the regulator sets the capital charge and deposit insurance premium payments sufficiently high for a risky portfolio, the bank commits to the low-risk asset portfolio by setting a lower leverage ratio. This market discipline effect disappears when the regulatory costs become too high.

How Does Risk-based Deposit Insurance Premium Affect Bank Risk Taking? Islamic Bank vis a vis Conventional Bank

Central banks across the world implemented deposit insurance system as a major risk management practice in the post Global Financial Crisis (2007/2008) period. This study provides insights on the efficacy of deposit insurance policy in the Malaysian market where Islamic and conventional banking co-exist. Given that Islamic banking principles inherently limitsbank risk taking ability, the study findings clearly identify the pertinent role of risk-based deposit insurance premium on mitigating potential increase bank risk in the post-financial crisis period. Using Malaysian banks data for the period 2002-2010, this study findsthat Islamic banks have lower risk appetite than conventional banks. Most importantly, after the introduction of deposit insurance system, insolvency and operational risk increasemainly for conventional banks owing to inadequate premium. This calls for policymakers to carefully consider design features for an effective risk-based DI system that is risk-premium sensitive to ensure financial stability. Other policy implications include that the risk-based deposit insurance premium would prevent regulatory arbitrage,while Shariahcomplianceprinciples preventthe Islamic banks from adjusting their risk after the introduction of a deposit insurance system. Worth mentioning is the institution of an early warning mechanism policy as well as formal cooperation in information sharing protocols among policy makers, regulators and deposit insurance organisations to minimiseoperational risk in banks.

Deposit Insurance Scheme Activities on Deposit Mobilization of International Association of Deposit Insurer Member Countries: Post Coreprinciple Effect

This study examined deposit insurance schemes’ activities and its effect on deposit mobilization of the International Association of Deposit Insurers (IADI) member countries. The study dwelled on the banking sectors post-core principles of the member countries. The study assessed the effect of deposit insurance fund, deposit insurance cover, deposit insurance premium and deposit fully covered on the total deposit of the banking sectors of 21 member countries of IADI spanning the period 2014 to 2018. Data were sourced from the annual reports of the selected countries Deposit Insurance Agencies. The study adopted the ex-post facto research design. The estimating technique was panel Vector Error Correction Model (VECM). Findings from the analyses showed that deposit insurance scheme activities of member countries did not significantly affect IADI’s member countries banking sectors deposit mobilization after the implementation of the core principle. IADI, as a policy-making body must, therefore, review and localize its core principles and policies in line with member countries’ uniqueness and financial realities through investment in research in member countries to isolate unique factors peculiar to member countries and streamline policies to capture member countries’ financial and economic conditions. IADI should monitor the compliance level of member countries to ensure strict implementation of its policy and principles by member countries.

Insurance Pricing, Distortions, and Moral Hazard: Quasi-Experimental Evidence from Deposit Insurance

Risk-based insurance pricing is often used to address ex ante moral hazard. However, very few studies analyze the effects of differential pricing on insured firms’ behavior or evaluate whether risk-based pricing is effective at mitigating ex ante moral hazard in practice. I exploit a quasi experiment in which deposit insurance premiums were changed for all U.S. banks with staggered timing, generating differentials between banks in both the levels and the risk-based “steepness” of insurance premiums. I find evidence that differentials in premiums resulted in distortions, including regulatory arbitrage, but also provided strong incentives to curb moral hazard. In addition, I find that firms that faced stronger pricing incentives to become (or remain) safer were more likely to subsequently do so than similar firms that faced weaker pricing incentives. The results point to the effectiveness of risk-based pricing and the need that it be governed with robust laws and regulatory controls.

Risk management of deposit insurance corporations with risk-based premiums and credit default swaps

In this paper, we propose a risk-based model for deposit insurance premiums and provide the closed-form formula for premiums, including early closure, capital forbearance, interest rate risk, and moral hazard. Our numerical analysis confirms the proposed pricing formula and the relative impact of the provisions for deposit insurance premiums. We illustrate how to use credit default swaps (CDSs) to manage the bank’s asset risk corresponding to the deposit insurance model. A failed bank, Washington Mutual, is used to demonstrate how to calibrate the model’s parameters and calculate fair premiums that are consistent with market risks on the basis of our proposed model and credit derivatives. Finally, a numerical experiment is designed to determine the optimal hedge ratio, which can minimise the variance of cash-flow of the deposit insurance corporations.

Optimal Deposit Insurance

This paper studies the optimal determination of deposit insurance (DI) when bank runs are possible. In a variety of environments, the welfare impact of changes in the level of deposit insurance coverage exclusively depends on three sufficient statistics: the sensitivity of the likelihood of bank failure with respect to the level of DI, the utility gain induced by preventing the marginal bank failure, which can be expressed in terms of the drop in depositors' consumption, and the direct social cost of intervention in bank failure scenarios, which can be expressed in terms of the probability of bank failure, the marginal cost of public funds, and the mass of partially insured depositors. The same expression applies a) when banks face perfect ex-ante regulation and b) when banks are not allowed to react to policy changes. Under imperfect regulation, because banks do not internalize the fiscal impact of their actions, changes in the behavior of banks induced by varying the level of DI (often referred to as moral hazard) only affect the level of optimal DI directly through a fiscal externality, but not independently. We characterize the wedges that determine the optimal ex-ante regulation, which map to liability-side regulation (e.g., deposit insurance premia) and asset-side regulation. Finally, we explore the quantitative implications of our approach through a direct measurement exercise and a model simulation.

Deposit Insurance Premiums and Bank Risk-Taking

Deposit Insurance Premiums and Bank Risk-Taking

Bank Capital Structure and Tail Risk

This paper presents a bank capital structure model in which bank assets are subject to both diffusion and tail risk. Of these two types of risk, tail risk causes uninsured deposits to be risky, as the bank's asset value can unexpectedly fall below the value of deposits in case of default. The model shows that tail risk, rather than diffusion risk, is the main driver of the risk on deposits when the bank is unregulated and of the endogenous deposit insurance premium when the bank is regulated. Keeping total volatility constant, the model shows that a high tail risk component leads to higher credit spreads, default risk, and magnitude of bank losses in default than a high diffusion risk component.

Shadow Insurance? Money Market Fund Investors and Bank Sponsorship

In this paper, we argue that bank-sponsored prime institutional money market funds (PI-MMFs) are different from non-bank-sponsored PI-MMFs. This difference can arise because the sponsoring bank holding companies (BHCs) can extend shadow insurance to ailing affiliated MMFs. We hypothesize that PI-MMFs price this shadow insurance through higher expense ratios. Indeed, after September 2008 when industry risk increased, expense ratios were seven basis points higher than those of non-BHC-sponsored MMFs. This increase is of similar size to the average deposit insurance premium charged by the FDIC in 2008. We also show, despite higher expense ratios, the redemptions in BHC sponsored MMFs were lower in contrast to expectations of prior literature.

Determinants of net interest margin: the effect of capital requirements and deposit insurance scheme

ABSTRACTThis paper analyzes the determinants of net interest margin with a focus on the impact of capital regulation and deposit insurance. We extend the Ho and Saunders (1981) family of models to explicitly include both capital requirement and the deposit insurance premium as determinants of net interest margin. The model predicts that the higher the capital requirements and deposit insurance premium, the higher banks’ interest rates will be. We test the theoretical model using panel data for OECD countries between 2000 and 2014. Our results support the positive relationship between both the capital requirement and the deposit insurance premium on interest margins. The most important determinants of the net interest margin are implicit payments, efficiency, average operating costs, the intensity of competition, the deposit insurance premium and capital stringency.

Valuation risk adjusted deposit insurance on heston model

Deposit insurance is a tool to stabilize the banking system. In managing deposit insurance in Indonesia, deposit insurance agency applies the flat rate premiun system which is the same premium imposition system for each bank without taking into account the different risk levels of each bank. The implementation of the flat rate, it can still cause moral hazard which can trigger the monetary crisis. To anticipate this problem, it is necessary to design a risk adjusted premium. One of method that can be used in determining deposit insurance premium is Fourier transform. In this study, we analyzed analytical solutions to determine risk adjusted deposit insurance premiums on Heston Model by using Fourier transforms. Based on the simulation results, it was found that the amount of volatility caused the value of deposit insurance premiums getting bigger, the smaller value of interest rates so the greater value of deposit insurance premiums. The high value of deposit insurance premiums is also influenced by the value of debt obligations and dividends value.