Working Paper: NBER ID: w3314
Authors: Ryuzo Sato; Rama V. Ramachandran; Bohyong Kang
Abstract: The purpose of this paper is to evaluate the Japanese deposit insurance scheme by contrasting the flat insurance rate with a market-determined risk-adjusted rate. The model used to calculate the risk-adjusted rate is that of Ronn and Verrna (1986) . It utilizes the notion of Merton(1977) that the deposit insurance can be based on a one-to-one relation between it and the put option; this permits the application of Black and Scholes(1973) model for the calculation of the insurance rate. The risk adjusted premiums are calculated for the thirteen city banks and twenty-two regional banks. The inter-bank spread in risk-adjusted rates in Japan is found to be as wide as in the United States. But the insurance system is only one component of the safety network for a county's banking system. The difference in the American and Japanese networks is described and its implications for the evaluation of the insurance system is discussed.
Keywords: deposit insurance; risk-adjusted rates; Japanese banks; banking stability
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flat insurance rate (G22) | excessive risk-taking (G41) |
| flat insurance rate (G22) | reduced depositor scrutiny (G28) |
| reduced depositor scrutiny (G28) | banks' asset choices (G21) |
| flat insurance rate (G22) | banks' asset choices (G21) |