||A Study on Reforming Taiwan's Deposit Insurance Pricing
||Department of Banking and Finance
option pricing model
risk-based deposit insurance premium
首先探討與定價攸關的各項議題，包括逆選擇與道德危險、保障額度與範圍、兩類最適存款保險費率的決定方法以及風險基準的存款保險費率能否解決道德危險問題等；其次回顧以選擇權評價模型計算風險基準的存款保險費率之重要文獻，主要為Merton (1977), Marcus and Shaked (1984) 與 Ronn and Verma (1986) 所提出的以選擇權評價為基礎的存款保險定價模型，因Ronn and Verma (1986) 較其他模型所具有的優勢，且考慮了監理姑息因素，故本論文選擇以此模型估計台灣32家上市銀行在1999至2001年的風險基準的存款保險費率。接著並參酌先進國家美加兩國在存款保險定價制度中改革之經驗，結合前章實證估計結果，提出對台灣存款保險最高保額、存保基金與風險基準存款保險費率改革之建議。
||Since the Financial Restructuring Fund will be ceded in the coming July of 2005, the Central Deposit Insurance Corporation (hence CDIC) will be required at that time to reassume the responsibilities of protecting the rights of depositors, keeping the sound operation of the banks, and maintaining the stability of financial system. How to reform the pricing scheme of Taiwan’s deposit insurance system in order to have the CDIC carry out its mandates again has been and still is the critical issue concerned. Thus, this thesis mainly focuses on the issue of how to reform the deposit insurance pricing system.
In the beginning, I examine the major issues related to deposit insurance pricing including adverse selection and moral hazard, the coverage of deposit insurance, the two kinds of pricing mechanisms applied to decide optimal insurance premium rates, and whether the risk-based deposit insurance premiums can solve the moral hazard problem. Then, I review the literature that applies option-pricing models to the deposit insurance pricing, especially those developed by Merton (1977) and his follows (Marcus and Shaked 1984, Ronn and Verma 1986). Furthermore, since that Ronn and Verma (1986) model owned advantages over other models and considered insurers’ policies, that is, regulatory forbearance, I pick this model to perform an empirical estimation using the data for 32 Taiwan Stock Exchange (TSE) listed commercial banks to calculate the proper deposit insurance premiums of these banks during the period of 1999 to 2001. And then, by considering the reforms of the deposit insurance pricing occurred in U.S. and Canada combined with the former empirical results, I propose recommendations for the reforms on the coverage of deposit insurance, the deposit insurance fund and the risk-based deposit insurance premiums of Taiwan’s CDIC.
The main findings are stated as follows: (1) the estimated deposit insurance premiums, in addition to increasing with time, are also increasing with the degree of regulatory forbearance. (2) Different degrees of regulatory forbearance will lead to different inferences regarding over- or under-charging. The extent to which the deposit insurer under- or over-prices the deposit insurance premiums will depend on the degree of regulatory forbearance. (3) While comparing Taiwan’s present risk-based assessment rates with our results, problems including the levels of premium rates being too low, the range too narrow, the spreads too small, the tiers too few become clear. Thus how to deal with these problems is the focal point of the reform.
The recommendations of this thesis for the reforms of Taiwan’s deposit insurance pricing are stated as follows: (1) in the aspect of deposit insurance coverage, we suggest not to increase the insured-deposit limit for the nonce. (2) In the aspect of deposit insurance fund, we suggest that Taiwan’s CDIC should have its own DRR in order to set proper premium rates to accumulate sufficient funds, and that the fund should fluctuate within some bounds when the actual reserve ratio of deposit insurance fund hits the DRR. (3) In the aspect of assessing deposit insurance premiums, we suggest that in order to ensure the fairness and effectiveness of the deposit insurance system, the premium rates should be raised or stringent closure rule along with PCA should be adopted, the ranges and spreads of premium rates should be widen, and the number of tiers should be increased in order to reflect the risks insured institutions bear.
The main contributions of this thesis are stated as follows: (1) it is the first study that applies option-based model, which is also incorporated regulatory forbearance to estimate proper deposit insurance premiums of Taiwan’s listed banks. (2) Utilizing the empirical results to induce the parts of Taiwan’s deposit insurance pricing that in urgent need for reforms, and the results also provide justifiability and empirical support for Taiwan CDIC’s intention to adjust its pricing system. (3) This thesis proposes an alternative option, which is an option-based and under regulatory forbearance model for Taiwan’s CDIC to reform its pricing system. This model incorporating market data and considering a bank’s potential liability to the insuring agency and regulatory forbearance helps CDIC in Taiwan set proper and elastic premium rates and provide incentives for insured banks to manage their risks. (4) The thesis proposes valuable recommendations for the reform of Taiwan’s deposit insurance pricing.
||TABLE OF CONTENTS
Chapter 1: Introduction 1
1.1 The Motivation of the Thesis 1
1.2 The Purpose of the Thesis 4
1.3 The Structure of the Thesis 6
Chapter 2: Issues on and Option Models for Deposit
Insurance Pricing 8
2.1. Introduction 8
2.2. Issues on Deposit Insurance Pricing 9
2.2.1. Adverse Selection and Moral Hazard in Deposit
2.2.2. The Scope and Level of Coverage 11
2.2.3. Choosing between Alternative Premium Systems 11
2.2.4. Can Risk-Based Deposit Insurance Premiums Control
Moral Hazard? 13
2.2.5. Incentive Compatible Deposit Insurance Pricing
and Regulation Policy 14
2.3. Option Models for Deposit Insurance Pricing 15
2.3.1. Merton’s Option Models for Deposit Insurance
2.3.2. Marcus-Shaked and Ronn-Verma Models for Deposit
Insurance Pricing 18
2.3.3. Other Option Models for Deposit Insurance
2.4. Summary of the Chapter 24
Chapter 3: Empirical Estimation of Deposit Insurance
Premiums Using Ronn-Verma Option Model for
Taiwan’s Commercial Banks 25
3.1. Introduction 25
3.2. Empirical Model 27
3.3. Data 30
3.4. Empirical Findings 32
3.5. Implications of Empirical Results 36
3.6. Summary of the Chapter 37
Chapter 4: Proposal for Reforming Taiwan’s Deposit
Insurance Pricing 53
4.1. Introduction 53
4.2. The Reforms of Deposit Insurance Pricing in U.S. and
4.2.1. The Reforms of the Coverage of Deposit Insurance
in U.S. and Canada 55
4.2.2. The Reforms of the Deposit Insurance Funds in
U.S. and Canada 59
4.2.3. The Reforms of Deposit Insurance Premiums in U.S.
and Canada 63
4.3. The Proposal for Reforming Taiwan’s Deposit
Insurance Pricing 70
4.3.1. The Reform Proposal for the Coverage of Deposit
Insurance of Taiwan’s CDIC 70
4.3.2. The Reform Proposal for the Deposit Insurance
Funds of Taiwan’s CDIC 72
4.3.3. The Reform Proposal for the Deposit Insurance
Premiums of Taiwan’s CDIC 75
4.4. Summary of the Chapter 79
Chapter 5: Conclusions 82
5.1. The Findings of the Empirical Estimation on the
Risk-Based Deposit Insurance Pricing 83
5.2. The Proposal for Reforming Taiwan’s Deposit
Insurance Pricing 84
LIST OF FIGURES
Figure 3-1 Risk-based Deposit Insurance Premium, 1999, under various ρs 40
Figure 3-2 Risk-based Deposit Insurance Premium, 2000, under various ρs 41
Figure 3-3 Risk-based Deposit Insurance Premium, 2001, under various ρs 42
Figure 3-4 A Comparison of Risk-based Deposit Insurance Premiums for the Three Years, ρ=0.95 43
Figure 3-5 A Comparison of the Actual and Weighted Average Premiums under Various ρs for the three Years 44
Figure 3-6 A Comparison of the Ranges of Deposit Insurance Premiums under Variousρs for 1999 45
Figure 3-7 A Comparison of the Ranges of Deposit Insurance Premiums under Variousρs for 2000 46
Figure 3-8 A Comparison of the Ranges of Deposit Insurance Premiums under Variousρs for 2001 47
Figure 3-9 A Comparison of the Spreads under Various ρs for the Three Years 48
LIST OF TABLES
Table 2-1 Payoffs of Firms Credits with a Third-Party Guarantee 17
Table 3-1 Risk-based Deposit Insurance Premiums (per ten thousand deposit), 1999 49
Table 3-2 Risk-based Deposit Insurance Premiums (per ten thousand deposit), 2000 50
Table 3-3 Risk-based Deposit Insurance Premiums (per ten thousand deposit), 2001 51
Table 3-4 Summary Statistics of Deposit Insurance Premiums (ρ = 0.95 ) 52
Table 3-5 Comparisons of the Means, Ranges and Spreads of the Risk-adjusted Deposit Insurance Premiums 52
Table 4-1 A Comparison of the Coverage of Deposit Insurance among U.S., Canada and Taiwan 59
Table 4-2 The Reforms of Deposit Insurance Funding & Fund Management among U.S., Canada and Taiwan 62
Table 4-3 The Percentage of Number of FDIC-Insured Institutions and Assessable Deposits in Risk Groups, 12/31/2002 64
Table 4-4 The Comparison of Risk Assessment and Intervention among U.S., Canada and Taiwan 69
Table 4-5 The Assigned Premium Rates for Each of the Nine Groups for the CDIC Insured Institutions 77
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