Premium
The Effects of Variations in Laxity (or Strictness) of Closure Rules on the Valuation of Deposit Insurance
Author(s) -
Lai Van Son
Publication year - 1996
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1996.tb00894.x
Subject(s) - closure (psychology) , valuation (finance) , bureaucracy , politics , insolvency , economics , business , actuarial science , finance , political science , law , market economy
The passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which removed some of the freedom or latitude the FDIC had in resolving and closing insolvent institutions, makes it clear that regulatory closure rules are not invariant with regard to time and events. Therefore, this paper analyzes the effects of variations in the laxity or strictness of bank closure rules on the valuation of deposit insurance. Hardly predictable state variables, such as political, economic and bureaucratic constraints, represent potential sources of uncertainty that drive changes in the stringency of closure policy. A variation of Ronn and Verma's [14] model is extended to consider situations where the insurance agency's closure rule is uncertain.