Risk-Based Assessment of Deposit Insurance Fund Adequacy
25 Pages Posted: 1 Jul 2012
Date Written: June 30, 2012
Abstract
We suggest a risk-based approach to deposit insurance fund adequacy assessment. The common practice for deposit insurers is set the target fund level based on the recent payouts history and most likely future losses. This approach underestimates the deposit insurer's risk, especially in the context of rapidly developing banking system fragility. In contrast, the proposed approach is consistent with capital adequacy regimes for banks and insurers and allows for a more prudent assessment of risk.
A deposit insurance fund should cover both expected and unexpected losses of the deposit insurance system at a sufficiently high confidence level. Based on a survey of theoretical literature and an extended dialog with deposit insurance practitioners, we give practical recommendations on designing and implementing risk-based deposit insurance fund adequacy assessment systems.
Keywords: deposit insurance, capital adequacy, economic capital, credit risk, Basel 2, Solvency 2
JEL Classification: G28, C19
Suggested Citation: Suggested Citation
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