The Effects of Setting Deposit Insurance Premiums to Target Insurance Fund Reserves

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Abstract

A common feature of many insurance systems is that they are "backed" by an insurance fund and insurance premiums are adjusted to target this fund's reserves. This study analyzes the fund targeting policy of the Federal Deposit Insurance Corporation (FDIC). It examines the distortions to banks' cost of deposit financing that result from setting premiums in this manner. The study's framework is a multiperiod, multibank contingent claims model where the stochastic rates of return on individual banks' assets are assumed to be correlated and match the actual empirical distribution of a sample of U.S. banks. The model identifies factors that are likely to exacerbate distortions due to insurance mispricing. The relative merits of a targeting policy and a flat-rate insurance policy are discussed, and the real effects of insurance mispricing are estimated. A method for valuing a government subsidy under a reserve targeting policy is also presented.

Original languageEnglish (US)
Pages (from-to)153-180
Number of pages28
JournalJournal of Financial Services Research
Volume16
Issue number2-3
DOIs
StatePublished - 1999

Keywords

  • Deposit insurance
  • FDIC

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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