@Article{mfj:1711,
title={The Valuation of Deposit Insurance Premiums when Considering Financial Regulations for Restricting the Bank's Default Probability},
author={Shu Ling Chiang and Ming Shann Tsai},
journal={Multinational Finance Journal},
volume={},
number={},
pages={--},
year=,
publisher={Multinational Finance Society; Global Business Publications},
url={http://www.mfsociety.org/}
keywords={},
abstract={After undergoing several financial crises, many countries have required that each bank obeys strict financial regulations. The general purpose of these financial regulations is to require bank’s default probability lower than a specific official default rate. Thus, when pricing a fair deposit insurance (DI) premium for banks obeying these financial regulations, the official default rate should be incorporated into the valuation model. In this paper, we present a valuation formula for DI premiums based on this premise. Moreover, we discuss a bank’s optimal investment based on the efficient frontier. Doing so can avoid probable inaccurate estimation of DI premiums caused by using market equity data. We use data from Taiwanese commercial banks to illustrate the application of our model. The empirical evidence clearly shows that the DI premium for banks that obey the financial regulations is lower than the premium estimated by the traditional model. According to the results, we suggest that the DI premium should be lower for banks that fully obey the financial supervisory regulations and do an excellent job in keeping their risks low. Doing so should be able to incentivize these banks to decrease their likelihood of default by strictly implementing the financial regulations, thus stabilizing the financial environment..},
}