Banking Policy and the Pricing of Deposit Guarantees: A New Approach
IMF Working Papers, December 1, 1991
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Bibliographic details
- Authors: W. R. M. Perraudin, Steven M. Fries
- Published: December 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451933192.001
Summary and Purpose
- Describes a new approach to pricing government deposit guarantees that uses techniques of stochastic process switching employed in the recent literature on exchange rate determination.
- The model avoids inconsistent assumptions about the information available to investors and the government common in previous work based on an option pricing approach.
- Objectives:
- Derive actuarially fair deposit insurance premia.
- Derive optimal financial reorganization rules.
- Examine the role of banking policies such as capital requirements.
Methodology
- Uses techniques of stochastic process switching as employed in the recent literature on exchange rate determination.
- Contrasts with previous option pricing approaches by addressing information consistency between investors and the government.
Key Findings and Analytical Results
- Actuarially fair deposit insurance premia are derived within the model framework.
- Optimal financial reorganization rules are derived.
- The role of banking policies, including capital requirements, is examined in the context of pricing deposit guarantees.
Policy Implications and Recommendations
- Provides a framework to price government deposit guarantees in a way that is actuarially fair.
- Offers guidance on optimal financial reorganization rules when banks face distress.
- Highlights the importance of banking policies, such as capital requirements, for the pricing and design of deposit insurance.