The Cost of Deposit Insurance with Stochastic Interest Rate:Forbearance and Examination Schedule

• Main Authors: Li-Fang Lin, 林麗芳
• Other Authors: Heng-Chih Chou
• Format: Others
• Language: zh-TW
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/92q98t

碩士 === 銘傳大學 === 財務金融學系碩士班 === 93 === Abstract The study estimates the costs of deposit insurance of Taiwan’s banks by using the Merton’s (1977) option pricing model. We use the Duan, Moreau and Sealey’s(1995) model by applying the Vasicek process into option pricing model. Then, we applies Duan’s (1994,2000) approach that uses the observed prices of a derivative contract to compute maximum likelihood parameter estimates for an unobserved asset value process. This part is different from Ronn and Verma’s(1986) approach, it could make estimation procedure conform to statistic consistency. The study includes two parts: firstly, with the parameter values, 0.97 of forbearance and 0.5 of maturity, we calculate the costs of deposit insurance. The estimated costs of deposit insurance are much higher than the actual cost. This result can be interpreted in two ways. The simplest interpretation is to conclude that banks were indeed subsidized by the deposit insurance system. Alternatively, one can attribute these results to the forbearance and examination schedule assumed in this study. Secondly, we imply the forbearance and maturity from the actual cost of deposit insurance and option pricing model. The results of the study have policy implication: for example, we can explain why banks in Taiwan seldom bankrupt by the implied low forbearance rate. Besides, Central Deposit Insurance Corporation (CDIC) should increase the examination frequency under low premium. Key Words: deposit insurance, stochastic interest rate, capital forbearance, examination schedules