Risk Adjusted Deposit Insurance for Japanese Banks
Rama V. Ramachandran
The purpose of this paper is to evaluate the Japanese deposit
insurance scheme by contrasting the flat insurance rate with a
market-determined risk-adjusted rate. The model used to calculate
the risk-adjusted rate is that of Ronn and Verrna (1986) . It
utilizes the notion of Merton(1977) that the deposit insurance can
be based on a one-to-one relation between it and the put option;
this permits the application of Black and Scholes(1973) oodel for
the calculation of the insurance rate. The risk adjusted preniums
are calculated for the thirteen city banks and twenty-two regional
banks. The inter-bank spread in risk-adjusted rates in Japan is
found to be as wide as in the United States. But the insurance
system is only one component of the safety network for a county's
banking system. The difference in the American and Japanese
networks is described and its implications for the evaluation of
the insurance system is discussed.
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