| This paper attempts to price federal deposit insurance for a large sample of banks using different option pricing techniques. The historical flat rate premium system and risk related premium matrix used by the FDIC lack the ability to differentiate and price risk among banks. In an effort to better quantify individual institution risk, deposit insurance is modeled as a European put option and financial data from bank call reports are used to estimate individual bank insurance premiums using three option pricing models. Premiums are generated for both public and private banks and each model is evaluated based on how it prices risk across institutions, indicates bank failure, covers the cost of bank failure, and how its premium estimates compare to historical assessments rates. While the contingent claim models presented in this paper effectively separate strong banks from weaker ones, their premium estimates are highly sensitive to minor variations in reported financial data. |
