Deposit Insurance Pricing By Considering Claiming In Advance

In the past 30 years, it had happened so many banking crisis all over the world. So,the countries tried to establish the deposit insurance system. The truly Deposit insurance system started in America in the 1930s. Over the years, the deposit insurance system had made important contributions in preventing bank runs protecting the legitimate interests of the depositors, preservation of the stability of financial markets and the world.The research of deposit insurance has focused on the pricing of deposit insurance. Study the existing academic papers and you can find that there is no more than two methods for pricing deposit insurance:option pricing model of Merton and its extended model, expected loss model. But they all assume that the deposit insurance can only claims at maturity, rather than in advance. In reality,a lot of bank may become insolvency and want to claim in advance.So, we need to study pricing of the deposit insurance by considering claiming in advance.The payment structure of deposit insurance by considering claiming in advance is like the structure of American put option. So we can treat the contract for deposit insurance by considering claiming in advance as an American put option that was sold by FDIC to the insured bank, and the premium is the price of the American put option. Because there is no explicit pricing formula for American put option, this paper uses the finite difference method that is a numerical method. The main part of this paper is formed by three parts:First,studied the pricing of the deposit insurance by considering claiming in advance in general situation. We choose the closing prices of the 16 listed banks’stock in our country as the samples.of our analog analyze, and then estimated the premium rate of the deposit insurance for every bank. We found that they are different from each others and range from 0.0002% to 0.4458%. The rates of state-owned commercial banks are relatively low, while the joint-stock banks’deposit insurance premium rates are relatively high.Second, studied the pricing of the deposit insurance by considering claiming in advance with regulatory forbearance.We estimated our country’s regulatory forbearance parameter is 0.96 by using the historical data of recapitalization for banks by our regulatory forbearance institutions, and then estimated the premium rate of deposit insurance for each bank, they range from 0.0007% to 0.8011%.Third, studied the pricing of the deposit insurance by considering claiming in advance with reinsurance.When facing a huge loss, a single Deposit Insurance Corporation will become powerless, so the idea of reinsurance will be considered. We considered there is only one reinsurance company, and then estimated the premium rate for the original insurance company and the reinsurance company by using the idea of excess of loss. The rates for the original insurance company range from 0.000076% to 0.02602% and the rates for the reinsurance company range from 0.000016% to 0.01420%.