The use of Hurst and effective return in investing

This study measures the deposit insurance premium under stochastic interest rates for Taiwan's banks by applying the two-step maximum likelihood estimation method. The estimation results suggest that the current premiums—charging 5, 5.5, and 6 basis points per dollar of insured deposits—are too low, but largely reflect the rank orders of the risks of the insured banks. Moreover, the regression results indicate that asset volatility dominates bank size in determining the insurance premium. When the volatility risk is decomposed into two parts, credit risk significantly dominates interest-rate risk. An examination of bank characteristics indicates that privately owned old banks are more likely to have lower levels of credit risk, asset volatility, and deposit insurance premiums than state-owned banks and newly chartered banks.     

How Country and Safety-Net Characteristics Affect Bank Risk-Shifting

Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This paper seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk-shifting occurs on average, substantial variation exists in the effectiveness of risk control across countries. We find that the tendency for explicit deposit insurance to exacerbate risk shifting is tempered by incorporating loss-control features such as risk-sensitive premiums, coverage limits, and coinsurance. Introducing explicit deposit insurance has had adverse effects in environments that are low in political and economic freedom and high in corruption.     

Bank credit default swaps and deposit insurance around the world

We investigate the impact of deposit insurance schemes on banks' credit risk – a predictor of failure and a key element in the current financial crisis. Unlike most studies, which use balance sheet measurements of risk, we adopt a forward-looking and market-based measure of bank credit risk: the credit default swap (CDS) spread. We find that banks in countries with explicit deposit insurance systems have higher CDS spreads, supporting the “moral hazard” view. The results suggest that deposit insurance design features that lessen the adverse impact are risk-adjusted premium, coinsurance systems, government-established systems, “risk-minimizing” systems, and systems with dual-funding sources. Full coverage appears to stabilize bank risk only during the financial crisis period. More stringent bank regulation, such as capital adequacy regulation and independent supervision, could reduce the undesirable impact of deposit insurance. Deposit insurance seems to help stabilize volatile markets, as evidenced during the financial crisis and in countries with greater market volatility. In addition, we find that the adverse impact of deposit insurance on bank credit risk is more pronounced for banks with low asset quality and low liquidity.     

What do premiums paid for bank M&As reflect? The case of the European Union

We analyze the takeover premiums paid for a sample of domestic and cross-border bank takeovers in the European Union between 1997 and 2007. We find that acquiring banks value profitable, high-growth and low risk targets. We also find that the strength of bank regulation and supervision as well as deposit insurance regimes in Europe have measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is driven by domestic deals. Similar qualitative results are found for both the entire sample and the sample of publicly traded targets.     

How Does Information Disclosure Affect Bank Systemic Risk in the Presence of a Deposit Insurance System?

ABSTRACT

This article establishes a dynamic game with incomplete information to theoretically analyze the influence mechanism of information disclosure on systemic risk in the presence of a deposit insurance system. To verify the mechanism, we use panel data on 247 global banks in 41 countries during the period 2006 to 2015 in an empirical analysis. Our article finds that a high degree of information disclosure can reduce deposit insurance premiums and weaken the negative incentive from a bailout by regulatory authorities. Moreover, the effect of deposit insurance on financial stability is not apparent, but the synergistic effect of deposit insurance and information disclosure reduces bank systemic risk. Furthermore, different deposit insurance designs affect bank behavior, so it is crucial for bank supervisors to create proper deposit insurance systems, which are helpful in strengthening market discipline and preventing moral hazard thus contributing to a stable financial environment. Therefore, under the deposit insurance system, regulatory authorities should strive to improve the standard of information disclosure to ensure systemic stability.     

Did the commercial paper funding facility prevent a Great Depression style money market meltdown?

This paper analyzes how risk premiums altered the use of commercial paper relative to bank loans during the recent financial crisis. Consistent with the theoretical and empirical literature on how surges in risk premiums can induce plunges in under-collateralized credit or credit funded with noninsured sources, results indicate that a spike in risk premiums induced a plunge in commercial paper use during the recent crisis. This paper also finds that Federal Reserve interventions in the money market helped prevent the commercial paper market from melting down to the extent seen during the early 1930s.     

Product pricing and solvency capital requirements for long-term care insurance

This paper presents a comprehensive assessment of premiums, reserves and solvency capital requirements (SCRs) for long-term care (LTC) insurance policies using Activities of Daily Living and US data. We compare stand-alone policies, whole life insurance policies with LTC benefit riders (LTC insurance combined with whole life insurance), life care annuities (LTC insurance combined with annuities) and shared LTC insurance in terms of net premium cost and SCRs. Net premiums and best-estimate reserves for base LTC insurance policies are determined using Thiele’s differential equation. Product features such as the elimination period and the maximum benefit period are compared using a simulation-based model. We show how a maximum benefit period can reduce costs and risks for LTC insurance products. SCRs for longevity risk and disability risk are based on the Solvency II standard formula. We quantify the extent to which whole life insurance policies with LTC benefit riders and life care annuities provide lower SCRs than stand-alone LTC insurance policies.     

The Benefits of Relationship Banking: Evidence from Small Business Financing in Finland

Using unique small business credit-file data from a major Finnish bank, I analyze how relationship characteristics are associated with loan interest rates. Data includes the effective loan rate and variables that describe the duration and scope of relationship, collateralization, firm characteristics, bank’s internal risk rating, and loan characteristics. The results show that longer duration tends to lower the cost of credit and that a long-term bank/firm relationship is beneficial especially to high-risk firms. As the relationship matures, the loan premiums for high-risk firms decrease at higher rate than for low-risk firms.     

ON THE SHAREHOLDER WEALTH EFFECTS OF DEPOSIT INSURANCE PREMIUM REVISIONS ON LARGE,PUBLICLY TRADED COMMERCIAL BANKS

Evidence is provided from changes in deposit insurance premiums in the early 1990s on the validity of the premium absorption hypothesis and the premium shifting hypothesis. Analysis of abnormal market returns associated with deposit insurance events using a market‐model event‐study methodology suggests that reductions in deposit insurance premiums are associated with increases in the market value of banking organizations; conversely, increases in deposit insurance premiums are associated with decreases in market wealth. The largest banks in the sample and banks with low equity capital (and low risk‐based capital ratios) appear to be most affected. These results are generally consistent with the premium absorption hypothesis but inconsistent with the premium shifting hypothesis.     

Institutions and Deposit Insurance: Empirical Evidence

Do banks’ responses to changes in deposit insurance vary across countries even if the countries have comparable institutions? If so, by how much? Using data on the financial performance of large banks in 15 financially and economically developed countries, we find that where deposit insurance has an effect, it is large and varies depending on the level of economic freedom, rule of law and corruption in the bank’s home country. As in prior papers, we show that during stable economic periods, increases in deposit insurance are associated with higher bank risk, both problem loans and leverage. In most, but not all, cases stronger institutions temper these effects. The institutions’ effects are substantial. For example, average changes in the rule of law double the impact of a change in deposit insurance on bank leverage. We contribute to the substantial literature in this area by showing that the institutional effects are significant even across a set of countries with comparable institutions; by conducting a careful calibration of the economic significance of the effects; by providing evidence that during stable periods changes in deposit insurance only affect bank risk and not other measures of performance; and finally by showing that the effects of both deposit insurance and institutions vary across stable and crisis economic periods. The stable period results are consistent with the moral hazard effects of deposit insurance, while the crisis period results are consistent with endogeneity concerns that poor bank performance could drive changes in regulations.     

债券保险发展进程及业务模式探索

我国信用债市场发展进入新时期,信用违约的常态化和高收益债券市场建立的需要催生了对信用风险管理和信用增级的需求,而债券保险正是满足这两种需求的有效手段。本文在借鉴债券保险发展的国际经验的基础上,立足我国债券市场与债券保险发展现状,指出了当前我国债券保险发展滞后源于制度建设落后、信用保护卖方保障不足等原因导致的盈利困难,并提出和论证了由保险公司提供结算型债券保险的新型保险模式。最后就当前我国债券保险发展存在的不足之处,从发展传统型债券保险和信用风险缓释工具两个角度提出了具体的政策建议。     

Deposit Insurance, Capital Adequacy Requirements and Interest Rate Dynamics

This paper examines the long run interaction among deposit insurance, bank deposit rates and capital adequacy requirements. Using analysis similar to the price discrimination model of Lott and Roberts (1991) we find that a competitive environment among banks would link the spread between insured and uninsured deposit rates to the size of the insurance premium. We also find that banks that choose to operate at the regulatory minimum capital level, would increase asset risk with increased capital requirements if (1) the implicit interest paid to insured and uninsured depositors is equally sensitive to changes in risk and capital adequacy and (2) the insurance premium is independent of the level of risk and capital adequacy. Under the present risk-based premium structure, asset risk has the potential to decline when the regulatory agency raises capital requirements. Finally, we examine the time series behavior of insured and uninsured interest rates to see if it is consistent with our theoretical model. We find that insured and uninsured rates, along with deposit insurance premiums, are cointegrated series as suggested by our model.     

差别化存款保险费率与银行风险承担——基于我国农村银行的经验证据

本文拓展了Freixas and Rochet(2008)的理论模型,证明存款保险差别化费率机制对银行风险承担具有抑制作用,在此基础上选取我国农村银行为研究对象,运用2015—2019年某省119家法人投保机构进行实证检验。研究发现:引入差别化费率设计显著降低了农村银行的风险承担;这一作用存在异质性,对于自身风险承担水平较低、资产规模较大的农村银行来说,抑制作用更为明显。进一步研究发现,差别化费率机制在一定程度上缓和了农信社改制短期内对农商行风险可能造成的不利影响。本文结论对加强存款保险制度的早期纠正功能、防范化解金融风险以及深化农村金融机构改革具有一定的理论意义和参考价值。     

Market Pricing of Deposit Insurance

We provide an approach to the market valuation of deposit insurance that is based on reduced-form methods for the pricing of fixed-income securities under default risk. By reference to bank debt prices as well as qualitative-response models of the probability of bank failure, we suggest how a risk-neutral valuation model for deposit insurance can be applied both to the calculation of fair-market deposit insurance premia and to the valuation of long-term claims against the insurer.     

The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin

Numerous studies have analyzed how a bank's intermediation margin varies with respect to such factors as credit quality, funding risk, bank capital, deposit insurance and other factors. However, these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise. Taking this very fundamental fact into account, we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals. Among other things, we find that greater volatility of interest rates tends to increase the margin. The strength of the correlation between the level of interest rates and the propensity to prepay loans (withdraw deposits) also plays an interesting role.     

What makes a bank risky? Insights from the optimal capital structure of banks

Assessing the risk of bank failures is the paramount concern of bank regulation. This paper argues that in order to assess the default risk of a bank, it is important to consider its financing decisions as an endogenous dynamic process. We provide a continuous-time model, where banks choose the deposit volume in order to trade off the benefits of earning deposit premiums against the costs that occur at future capital structure adjustments. The bank’s asset value may suffer from shocks and follows a jump-diffusion process.     

Optimal insurance and reinsurance policies chosen jointly in the individual risk model

The paper studies the so-called individual risk model where both a policy of per-claim insurance and a policy of reinsurance are chosen jointly by the insurer in order to maximize his/her expected utility. The insurance and reinsurance premiums are defined by the expected value principle. The problem is solved under additional constraints on the reinsurer’s risk and the residual risk of the insured. It is shown that the solution to the problem is the following: The optimal reinsurance is a modification of stop-loss reinsurance policy, so-called stop-loss reinsurance with an upper limit; the optimal insurer’s indemnity is a combination of stop-loss- and deductible policies. The results are illustrated by a numerical example for the case of exponential utility function. The effects of changing model parameters on optimal insurance and reinsurance policies are considered.     

Deposit Insurance and Forbearance Under Moral Hazard

We study the efficacy of forbearance using a real options approach. Our model endogenizes moral hazard embedded in credit risk undertaken by the bank. The bank's interest rate risk is modeled as duration mismatch. Other modeling improvements over previous studies include such features as stochastic interest rates and deposits, continuous interest payments on an ongoing deposit portfolio, and a stochastic forbearance period. We find that the bank does have an incentive to engage in undue risk taking. Even in the presence of moral hazard, however, forbearance can still be a desirable course of action in reducing the FDIC's expected liability. In addition, the capital ratio plays an extremely important role in determining the fair insurance premium. Finally, using the mismatch of asset and deposit durations as the correct measurement of interest rate risk, our model reveals that an optimal asset variance may exist for a particular bank, contrary to what the contingent claims framework would predict. Therefore, we resolve the puzzle that banks in practice do not increase asset risk to take full advantage of the limited liability.     

RISK-TAKING INCENTIVES OF BANKS AND RISK-ADJUSTED DEPOSIT INSURANCE

The manager of a depository institution is shown to exhibit risk-taking behavior under the current insurance arrangement. Perfect monitoring or risk-based deposit insurance would eliminate this incentive if information were symmetric between bank managers and the insuring agency. Absent symmetric information, it is shown that a recently suggested scheme, where insurers collect insurance premiums based on projected and actual risk levels, does not control the risk-taking incentive. The only way to control this incentive through insurance rates is to levy a relatively high premium, which is not actuarially fair.     

Chinese write-down bonds and bank capital structure

In this paper, we use a structural model to investigate a bank capital structure that contains deposits, straight bonds, Write-Down (WD) bonds and equity. We first explicitly give the default boundaries and the values of a deposit, straight bond, WD bond, equity and bank asset, and then use a numerical example to demonstrate the relations among leverage, deposits, WD bonds and bank value. Our results show that value-maximizing banks select the ratio of deposit, straight bond and WD debt so that endogenous default is consistent with exogenous bank closure. The bank increases its leverage by swapping both deposits and straight bonds for WD bonds. And the issuance of WD bonds not only reduces the expected bankruptcy loss and credit spread of straight bonds, but also improves the bank value. This indicates that WD bonds do help to stabilize banks. We also study the role of deposit insurance and the Chinese Financial Stability Bureau (FSB), and give a closed-form expression for the fair insurance premium. Lastly, to check the robustness of our results, we do the sensitivity analysis and investigate the effect of three sets of exogenous parameters on bank capital structure: WD parameters, bank business features, closure rules and insurance subsidy, and obtain some practically significant implications.