| A parametric model for the banking sector is developed with the objective to seek a design where each bank self monitors its own risk level, the need for regulations is decreased, banking sector becomes more stable, and social cost is decreased.; The main features of the proposed design include: (1) A risk based insurance policy, where insurance premiums were based on risk class of a bank. (2) On-site examinations continue to play an important role in forcing management to recognize losses that have already occurred, and potential losses, that are likely to occur. These examinations bring book value of equity closer to its market value. Risk classification of banks is determined on the basis of performance reports. (3) On-site examination frequency is based on risk class of a bank, riskier bank being examined more frequently. (4) A bank is required to infuse additional capital, when equity falls below a minimum equity level, e{dollar}sb1{dollar}. No dividends are allowed, if equity is below e{dollar}sb1{dollar}. (5) Bankruptcy is declared, when equity falls below a specified level, e{dollar}sb0{dollar}.; The objective is to make the FDIC breakeven. The annual inflows of the FDIC include the insurance premiums, and the annual outflows include bankruptcy losses of banks, which go bankrupt, examination costs, administrative cost, interest charged at interest rate {dollar}alpha{dollar} on a reserve S{dollar}sb0{dollar}, which is adequate to absorb annual differences between revenues and expenses over a specified time T, and systemic risk cost which is incurred on unsecuritized assets. The Securitization is included as a parameter u which represents the fraction of unsecuritized assets.; It is assumed that market value of equity follows a Wiener Process with constant parameters ({dollar}mu,sigma{dollar}), where {dollar}mu{dollar} denotes a negative drift rate. Expressions for the expected annual losses are developed. The criterion of making the FDIC to breakeven is not enough to determine the premium rates uniquely. Additional constraints are imposed to fix these rates for various risk classes, but these rates cannot be claimed to be equitable. This thesis ends with setting up a parametric model. The next stage of finding optimal values of the parameters using response surface techniques and experimental designs, which will give a robust design is left as a problem for future research. |
