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Deposit Insurance around the WorldIssues of Design and Implementation$
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Asli Demirguc-Kunt, Edward J. Kane, and Luc Laeven

Print publication date: 2008

Print ISBN-13: 9780262042543

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262042543.001.0001

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Pricing of Deposit Insurance

Pricing of Deposit Insurance

(p.81) 3 Pricing of Deposit Insurance
Deposit Insurance around the World

Luc Laeven

The MIT Press

This chapter performs an investigation on how the price of deposit insurance is affected by design features of deposit insurance schemes. It answers certain questions as to the definition of a fair price, the cost of deposit insurance, payment for bank losses and bank systemic risk, and how deposit insurance is affected by financial regulation. The chapter considers that the actual contributions by banks to cover deposits as well as their pricing as fair is what is referred to by the funding of deposit insurance. Alternative methods of pricing value of deposit insurance are explored in the chapter, namely Merton’s option pricing model and the expected loss pricing approach. Using market-based models is therefore seen as vital due to their ability to create estimates of actuarially fair deposit insurance premiums for banks.

Keywords:   price of deposit insurance, deposit insurance schemes, fair price, bank systemic risk, financial regulation, option pricing, expected loss pricing

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