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- Publications de la Banque centrale européenne
The misconception of the option value of deposit insurance and the efficacy of non-risk-based capital Requirements in the literature on bank capital regulation
| Numéro | 46 |
| Date | 13 July 2010 |
| Auteur | Paolo Fegatelli |
| Résumé | This study shows how the misconception of the option value of deposit insurance by Merton (1977) and its later misuse by Keeley and Furlong (1990), among others, have led some literature supporting the adoption of binding non-risk-based capital requirements to derive incorrect conclusions about their efficacy. This study further shows that what Merton defines as the option value of deposit insurance is actually a component of a bank’s limited liability option under a third-party deposit guarantee. As such, it is already included in the value ofthe bank’s equity capital, and the flawed definition makes the Keeley-Furlong model internally incoherent.
JEL Classification: G21, G28, G11 Keywords: Capital requirements, Credit risk, Deposit insurance, Prudential regulation, Portfolio approach. Published in the Journal of Financial Stability (Vol. 6, Issue 2, June 2010, pp. 79-84; doi:10.1016/j.jfs.2009.06.001) |
| Téléchargement | Cahier d'étude 46 (pdf, 322 KByte) |
