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Revisiting the valuation of deposit insurance

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  • Chuang‐Chang Chang
  • San‐Lin Chung
  • Ruey‐Jenn Ho
  • Yu‐Jen Hsiao

Abstract

This 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.

Suggested Citation

  • Chuang‐Chang Chang & San‐Lin Chung & Ruey‐Jenn Ho & Yu‐Jen Hsiao, 2022. "Revisiting the valuation of deposit insurance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(1), pages 77-103, January.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:1:p:77-103
    DOI: 10.1002/fut.22284
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