A Reexamination of the Over- (or Under-) Pricing of Deposit Insurance

This study shows how fair deposit insurance premia can be calculated using data on bank stock prices, interest rate movements, and income and balance sheet accounts. Fair insurance premia are estimated under the alternative assumptions that the FDIC provides either a "limited-term" (variable rate) or "unlimited-term" insurance contract to banks. The paper's results suggest that for nearly all of the large commercial banks in the sample, the actual insurance premium charged by the FDIC falls between the bounds of fair limited-term and unlimited-term insurance premia. Copyright 1987 by Ohio State University Press.