Exam 19: Deposit Insurance and Other Liability Guarantees

The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset quality and level of leverage of the DTI.

As a result of loan write-offs, Bank A has to be liquidated by the regulators. The book value of the assets and liabilities of the bank is presented below (in millions of dollars). The market value of the loans has been estimated at $240 million. What is the cost to the insured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?

Pricing deposit insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce incentives to take risks.

Requiring higher capital ratios often is proposed as method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

Deposit insurance contracts can be structured to reduce moral hazard behaviour by

When risk-taking is not actuarially fairly priced into deposit insurance premiums

The policy of forbearance practiced by regulators would allow many banks to remain open even in the face of continuing losses and insolvency.

The system of flat deposit insurance premiums:

Borrowing from the Bank of Canada as lender of last resort is a suitable substitute for deposit insurance and a possible method of preventing bank runs.

The employment of deposit brokers allows individual depositors to receive deposit insurance coverage on total asset balances well in excess of $100,000 at any given bank.

Moral hazard at FIs may

The Canadian safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.

Statistical credit scoring models have been suggested for use in measuring the risk of DIs for the purpose of assigning deposit insurance premiums.

Which of the following is a drawback of charging flat deposit insurance premiums?