The Study Of Commercial Bank Deposit Insurance Pricing

Commercial banks rely heavily on liabilities. The operation model determines banks’ inherent vulnerability. Unfortunately, bankruptcy of commercial banks has negative externalities and will harm stability of not only financial industry but also the whole society. In order to reduce the born risk of bank industry, many counties establish financial security network. Currently China exist lender of last resort system and prudential supervision system, but the construction of deposit insurance system is still in progress. In November 2014, China central bank published "Deposit Insurance Act (Requests for Comments)", which mean China deposit insurance system prepared for two-decade long is about to appear in the stage of history.This paper studies premium rate model, the core of deposit insurance system and dedicates to extend the expected loss method. By fitting the loss distribution of bank asset, expected loss pricing model can calculate an accurate premium rate that can reflect bank’s risk. However, traditional expected loss method assume deposit as the only liability of bank, this paper argues that commercial banks contain various kind of liabilities and diversified debt structure of bank will not only influence loss amount of deposit but also affect the risk appetite of commercial banks. Thus this paper is about to conduct a deposit insurance premium model by not only fitting the asset loss distribution but also relaxing the classic hypothesis of bank liability structure. When considering liability structure of bank, debt is divided into five categories according to debt repayment order:accrued payroll liabilities, secured debt, deposits, taxes payable, unsecured debt. In order to verify that conducted pricing model can be used in practice, twelve commercial banks which are listed in stock market are chosen to calculate premium rate. By comparing the result with commercial bank deposit insurance premium of United States, the result concludes that the pricing model conducted by this paper deserves reference. The original intention of this paper is to extend the expected loss method of commercial bank deposit insurance. Although there is a gap between theory and practice, and the pricing model conducted in this paper may not be fully used in practice, but it is still suggested that liability structure should be regarded as a factor when determining the deposit insurance premium rate of commercial banks.