Deposit Insurance Pricing Of Small Banking Institutions In Rural Areas

Deposit insurance system, as an innovative senior financial system has two sides,the implementation of the appropriate deposit insurance will help to stabilize thefinancial system, if blindly build deposit insurance system or implement inappropriatetype, system risk will restrict system function, and even endanger the stability of thefinancial system. Deposit insurance system has experienced70years, there are bothsuccessful experience and lessons of failure. The biggest drawbacks of the currentdeposit insurance system is adverse selection and moral hazard, the root cause ofthese problems is lack of a reasonable.Deposit insurance premiums standard. So, it isvery important to design a reasonable pricing of deposit insurance. There were a lot ofscholars study the deposit insurance pricing of the listing of the large andmedium-sized Banks,and also reached consensus.However, unlisted small Bankspricing method is still controversial and difficult, to make the deposit insurancefunction well,study for pricing of small banks has important significance.First this paper introduces the basic methonds of deposit insurance pricing,thenanalyzes the characteristic and applicability of Option pricing method and expectedloss pricing method. And then combining their applicability and risk characteristicsof small Banks, we chose the expected losses pricing method. Second making aanalysis of smaller Banks’ loss distribution, to choose the appropriate lossdistribution function logarithmic normal distribution, then deduced the pricingmodel and made parameter estimation. The key parameter is the default rate in themodel. There are three main methods about defaults estimating，we choose ratinganalysis in order to make it accurate. In recognized rating agencies,we choose Moodybecause of its author credit risk assessment system and its comprehensive databaseabout default rate, each moody’s rating has the corresponding default rate in thedatabase.Moody’s deposit rating has two steps, Bank Financial Strength Ratings andexternal supportThird corresponding the regulatory rating and moody’s rating of rural small bankinstitutions, to make a small bank with the regulatory rating can get correspondingmoody’s rating and default rates.There are many commons in the regulatory rating andBFSR, we directly replace the same quantitative indicators,map the similar qualitativefactors, compare small banks and nine big or medium-sized commercial Banks with moody’s rating about macro factors’ measure. Then synthesize all can get BankFinancial Strength Ratings..Comparing small banks and five medium-sizedcommercial Banks with moody’s rating to get their external support then multiplngBank Financial Strength Ratings and external support to get the final moody’s depositrating and default rateIn the end,we can conclude the corresponding moody’s rating of regulatoryratings’ rural small bank institutions,Level1, Level2, Level3Level4A, Level4B,Level5A, Level5B correspondings the Baa3、Ba1、Ba3、B2、B3、Caa2andCaa3.Then we can get the corresponding default rate and calculate the depositinsurance rates.