TY - JOUR
T1 - Risk-based capital standards, deposit insurance, and procyclicality
AU - Pennacchi, George G.
N1 - Funding Information:
I am grateful to Mark Flannery, George Kaufman, Eric Rosengren, Anjan Thakor, and two anonymous referees for valuable comments. I thank the Federal Deposit Insurance Corporation (FDIC) for providing financial support for this research. The views expressed are my own and do not necessarily represent those of the FDIC.
PY - 2005/10
Y1 - 2005/10
N2 - This article shows that risk-based deposit insurance premiums generate smaller procyclical effects than do risk-based capital requirements. Thus, Basel II's procyclical impact can be reduced by integrating risk-based deposit insurance. If deposit insurance is structured as a moving average of contracts, its procyclical effects can be decreased further. Empirical illustrations of this are presented for 42 banks over the period 1987 to 1996. The results confirm that lengthening the contracts' maturities intertemporally smooths premiums but raises the average premium level needed to compensate the insurer for greater systematic risk. The distribution of risk-based premiums across banks is skewed.
AB - This article shows that risk-based deposit insurance premiums generate smaller procyclical effects than do risk-based capital requirements. Thus, Basel II's procyclical impact can be reduced by integrating risk-based deposit insurance. If deposit insurance is structured as a moving average of contracts, its procyclical effects can be decreased further. Empirical illustrations of this are presented for 42 banks over the period 1987 to 1996. The results confirm that lengthening the contracts' maturities intertemporally smooths premiums but raises the average premium level needed to compensate the insurer for greater systematic risk. The distribution of risk-based premiums across banks is skewed.
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U2 - 10.1016/j.jfi.2004.09.001
DO - 10.1016/j.jfi.2004.09.001
M3 - Article
AN - SCOPUS:27644548173
SN - 1042-9573
VL - 14
SP - 432
EP - 465
JO - Journal of Financial Intermediation
JF - Journal of Financial Intermediation
IS - 4
ER -