The Deposit Insurance Pricing Considering Operational Risk

Basel commitemment of BIS on July 1988 passed a protocol,called for Basel Accord,which is about unifying the computation of capital and the standard of capital of Banks all around the world. This aggrement on bank tables inside and outside demand the risk capital adequacy ratio,while it didn’t define operation risk clearly.In 1997 baht causing the Asian financial crisis and a trader of barings causing bank bankruptcy provoke thought, that the problems existing in the fiannce ware not only due to the market risk and credit risk,but because of operational risk.That means the market risk, credit risk and operational risk under the interaction or independently affects the standard operation of the banking sector. Under this background Basel commitement in 1988 decided to modify the early Basel Accord and published the new Basel Accord in 2001 that was implemented since 2004. Basel II made operational risk independent from other types of risk,giving it a clear definition and including it in capital adequacy ratio.The operation risk, market risk and credit risk are defined as three major risk a modern banking facing.The latest Basel Accord published in 2013 Further emphasized the importance of operation risk,and required for operation risk allocation of capital in the proportion of total capital increasing. Operation risk is one of the most three important risk of bank,but the existing pricing model of deposit insurance do not consider this risk.This article introduces the deposit insurance pricing theory, on the basis of traditional theory pointing out that the current deposit insurance pricing model ignores the impact of operational risk, and puts forward the operation risk to join in the study of the deposit insurance pricing.The main reason of modern commercial bank asset volatility is that the market risk, credit risk, operation risk.In other words the three risk making loss lead to changes occurred in the company’s assets, which causes a company’s assets and liabilities off. That is to say deviating too much can lead to bankruptcy.According to the requirements of the modern commercial bank risk management, deposit insurance is used to protect banks from more than loss of confidence level.Expected losses pricing method of the deposit insurance pricing is used in this article, among them the loss distribution method is adopted to quantify operational risk loss, followed by using GARCH (1,1) model to depict the market risks, using multivariate GARCH BEKK model to quantify credit risk.Respectively, operational risk, market risk, credit risk of the marginal distribution is adopted in this paper. Considering the nonlinear correlation among risk copula function connect method is used to describe the relationship between the risk.Use empirical copula connect function method to select the optimal copula connect function to connect three big risk.First choose the optimal copula fuction to get joint loss distributionof market risk and credit risk, and obtain premium according to the proportion of the deposit insurance in the loss distribution;Then select the most optimal copula function to joint market risk, credit risk and operation risk.With the joint distribution of the three risk, get the premium according to the same method;Finally comparing premium considering operation risk and premium do not considering operation risk.In the end we get the conclusion that the the operation risk of commercial Banks pricing has a great influence on pricng of deposit insurance.