NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Risk Adjusted Deposit Insurance for Japanese Banks

Ryuzo Sato, Rama V. Ramachandran, Bohyong Kang

NBER Working Paper No. 3314
Issued in April 1990
NBER Program(s):   ME

The purpose of this paper is to evaluate the Japanese deposit insurance scheme by contrasting the flat insurance rate with a market-determined risk-adjusted rate. The model used to calculate the risk-adjusted rate is that of Ronn and Verrna (1986) . It utilizes the notion of Merton(1977) that the deposit insurance can be based on a one-to-one relation between it and the put option; this permits the application of Black and Scholes(1973) model for the calculation of the insurance rate. The risk adjusted premiums are calculated for the thirteen city banks and twenty-two regional banks. The inter-bank spread in risk-adjusted rates in Japan is found to be as wide as in the United States. But the insurance system is only one component of the safety network for a county's banking system. The difference in the American and Japanese networks is described and its implications for the evaluation of the insurance system is discussed.

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Document Object Identifier (DOI): 10.3386/w3314

Published: Sato, Ryuzo (ed.) The selected essays of Ryuzo Sato. Volume 2. Production, stability and dynamic symmetry, Economists of the Twentieth Century series. Cheltenham, U.K. and Northampton, MA: Elgar, 1999.

 
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