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Optimal Bank Reorganization Policies and the Pricing of Federal Deposit Insurance
Author(s) -
ACHARYA SANKARSHAN,
DREYFUS JEANFRANCOIS
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb02655.x
Subject(s) - deposit insurance , bank rate , official cash rate , monetary economics , fixed deposit , investment (military) , interest rate , chinese financial system , economics , closing (real estate) , business , financial system , finance , central bank , monetary policy , china , politics , political science , law
Optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits, and interest rate on deposits, the economy's risk‐free interest rate, and the regulators' bank audit/administration costs. Under competitive conditions, the threshold assets‐to‐deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one. Optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank's risk on investment and nonincreasing in the bank's current assets‐to‐deposits ratio.