A Study On Deposit Insurance Pricing Mechanism Based On Risk

As the development of the economy and finance of the world, how to guarantee the finance operations already becomes the great subject which can't be avoided.The system of the bank is a key component of the financial system, but the bank system has inherent instability, and such inherent instability has a strong externality, so the stability of the bank system is core and key of the finance stability. But the finance stability is the stability of the financial system, it is the stability which is in the trends and developing. It does not mean "zero bankrupt ". In fact, " zero bankrupt " means that the bank system is overstaffed with poor efficiency. It also means risk gathering and the"pollution"of the good bank by the bad bank. We need to set up a mechanism which can make a stable financial institution by eliminating the bad bank from financial institution. And the deposit insurance system can guarantee that the medium and small depositor could get compensates quickly when the bankruptcy happen, therefore strengthen the confidence of depositor. The deposit insurance system could prevent the destabilizing factor from spreading to the other banks because bankruptcy of the specific bank.The deposit insurance system emerged in Czechoslovakia in 1924 first. America set up federal deposit insurance system in 1934. After this, most developed countries and some developing countries set up the deposit insurance systems which are based on the economic situation of their own country. At present, about 100 countries or regions have already adopted the deposit insurance system. from the situation of the own countries and regions which set up the deposit insurance system , the deposit insurance system is improving the public confidence of the financial institution.In June 2005,The people's bank of china(PBC) released a document entitled "annual report 2004",which declared that the PBC would take the construction of deposit insurance system as their main work in maintaining the stability of finance in the year of 2005.Because the pricing of deposit insurance is one of the principal components of the deposit insurance system and there is no systemic study on this field,I take a try to study on it. The pricing of deposit insurance is the core of risk management. This paper introduces and discusses deeply the option-pricing model, the expectation- loss-pricing model. It also makes quantitative analysis on the deposit insurance's price. Then we get a conclusion that the pricing of deposit insurance based on risk was more fit for china's reality.This paper has also been divided into six chapters. The first chapter is an introduction, which conclude the background of study and raised the question of our study. The second part of this chapter is a literature summary which conclude collected some new achievements from foreign and domestic.The second chapter concerns the formation mechanism of deposit insurance price. In the first part of the chapter, we introduced the deposit insurance system.Through analyzing of the reason why deposit insurance system has been built up to state the necessity of its existence. The second part of this chapter described the formation mechanism of deposit insurance price. The formation mechanism of deposit insurance price is a system of information gathering, recognition and evaluation.The third chapter concerns with the pricing methods such as Merton model , Marcus & Shaked(M&S) model and Ronn & Verma(R&V) model. M&S model and R&V model are the revision on the basis of Merton model.The forth chapter represents the expected loss pricing model and shows how to measure the two principal variables of the expected loss pricing method. The fifth chapter ,we give the insurance premium of five banks by the using of the R&V model and expected loss pricing model. Through analyzing of the different of these insurance premium between these banks, we get many useful conclusion.The last chapter gives some policy recommendations.The innovation of this paper is giving a systemic study of deposit insurance pricing; To calculate the insurance premium of Chinese bank by using the data of reality; Giving the feasibility of these models through comparing of the different of these insurance premium between these banks.