An Empirical Research On Deposit Insurance Pricing System Of Chinese Banks

Deposit insurance system is an important mean of social tools in protecting the healthy development of economic infrastructure, reducing the financial crisis. This paper describes the deposit insurance system option pricing model and calculates the Rate of China’s banking insurance.Firstly, this paper reviewed the research results at home and abroad. Deposit insurance pricing system develops well abroad and has already established some useful models like option-pricing model and the expected loss model. However, the domestic research on deposit insurance pricing model is few. Therefore, this article will calculate the deposit insurance price of domestic banks.Secondly, this paper introduces the classic option pricing model, mainly Merton(1977) model and Ronn&Verma(1986) model. The main principle of option pricing model is to consider the deposit insurance as a put option, using the Black-Scholes option pricing formula to analyze deposit insurance price.Again, we will explain the meaning of reasonable premium structure to help to reduce moral hazard and adverse selection. Then, we will analysis deposit risks in China. In this article, we divide all the banks into three categories because of bank’s assets and bad loans conditions. They are state-owned banks, joint-stock commercial banks and other financial institutions.Then, we estimate insurance rates of state-owned banks, joint-stock commercial banks and other financial institutions. Calculation results show that the range of state-owned banks is from0.006%to0.023%; data of joint-stock commercial banks differs significantly, which states that Merchants bank and CITIC bank owe low rates while Shanghai Pudong Development bank and Minshng bank much higher. They range from0.028%to1.6%. The remaining banks have a range of0.089%-0.33%.Finally, some suggestions are given to perfect the deposit insurance system. At present, the basic rate of deposit insurance could be set at0.015%-0.018%. Because of risk difference between banks considering their systematic differences, we implement different levels of deposit insurance premium rate in three types, while within the same type set a single rate.