Deposit Insurance Countercyclical Pricing Method Based On The Tradeoff Of The Positive And Negative Effects

The deposit insurance mechanism generates both the positive and the negative effects. For instance, when decreasing the deposit repayment risk, it may encourge the bank to take the moral hazard behavior; when enhancing depositors’ confidence, it may reduce their motivation to supervise the banks’ operation; when inhibiting the risk contagion effect, it may distort the competitive mechanism of the banking system. The traditional risk-based deposit insurance pricing method has the pro-cyclical characteristics, which may weaken the positive effects or worsen the negative effects of deposit insurance to some extent. Therefore, for balancing the dual effects of deposit insurance, it is of pratical significance and theoretical value to build a long term countercyclical deposit insurance pricing model.The main contributions of this thesis contain:(1) It measured the deposit stabilization effect of deposit insurance. A model is proposed to measure the deposit stabilization effect of deposit insurance under heterogeneous beliefs of depositors. The decision making process of depositors with heterogeneous beliefs is given. The stabilization effect of deposit insurance under normal economic situation is measured by comparing the deposit scale of insured banking system with that of the system without deposit insurance. The deposit running off amount under extreme events, with explicit and implicit deposit insurance, are computed respectively. And the difference between the two is calculated to measure the stabilization effect of explicit deposit insurance. Several scenarios with varying parameters are constructed to test the model. The results show that it is positively correlated between the stabilization effect of deposit insurance and the insured proportion. The stabilization effect is more significant when the economic situation deteriorates or the banking system is of more information transparency.(2)It measured the risk contagion inhibiting effect of deposit insurance.Taking the expected shortfall (ES) of the bank’s assets value as an index to measure the assets risk of the bank. The risk contagion (RC) effect among the listed banks in China is analyzed empirically based on the quantile regression model. The difference between the RC effects of the banking system before and after taking deposit insurance are calculated through simulation to estimate the RC inhibiting effect of deposit insurance. The results show that the RC effect between any two banks is asymmetric. Risk events happened in different banks impact on the risk of the banking system differently. Deposit insurance may control the risk of the banking system within a limit scale when significant events occur. It is positively correlated between the RC inhibiting effect of deposit insurance and the degree of the RC effect caused by risk events.(3) It measured the risk incentive effect of deposit insurance for individual banks. Firstly, the degree that banks increase their shock resistance ability after taking deposit insurance is measured based on the analysis results of deposit insurance stability effect. Secondly, using prospect theory, the difference between the bank’s equity prospect value before and after taking deposit insuran is derived. Further more, according to the boundary condition of bank’s credit investment, which is to keep the insured bank’s equity prospect values stay the same. Finally, simulation analysis is given to show the deposit insurance risk incentive effect of the14listed banks in2012. The results illustrate that the banks’subjective believes in the occurrence probability of risk events strenghten their cognition of deposit insurance risk resistance effect. Overall, the deposit insurance insured ratio and the risk incentive effect are positive related.(4) It built a long term deposit insurance model in order to measure the countercyclical premium. The risk factor that affects the value of bank assets is decomposed into systematic risk factor and bank idiosyncratic risk factor, so as to introduce macroeconomic condition which represents systematic risk into the pricing model of deposit insurance. Thereby this paper proposes a countercyclical pricing method of deposit insurance. Through the empirical and simulation analysis, the deposit insurance premium that across five years (2008-2012) of14listed banks in China are obtained. A comparison of the countercyclical pricing method with other pricing method is made from the perspective of both the average annual premium and the countercyclical characteristic. The sensitivity analysis of two parameters is constructed to test the model. The results show that there is a negatively correlated relationship between the basic premium of countercyclical deposit insurance and the deposit insured proportion. Meanwhile, the countercyclical pricing method takes an extra cost.(5) A game model is established with the regulators, the deposit insurance company and the banks as players and with some positive and negative effects of deposit insurance as constraint conditions. Using Monte Carlo simulation method, all parties’ intrests, which are influenced by relevant provisions and the deposit insurance premium, are estimated. The ideal value of a series of parameters, such as the countercyclical coefficient, the insued top and bottom limitation, the regulatory refinancing amount, are determined so as to limit the banking system’s shortfall risk as long as to balance the deposit insurance fund. Several scenarios with varying parameters are constructed to test the model.