Department of Finance, Stern School of Business, New York University. We are thankful to Ned Elton, Marti Gruber, David Pyle, Tony Saunders, René Stulz, Joe Williams, and an anonymous referee for their generous comments and suggestions.
Optimal Bank Reorganization Policies and the Pricing of Federal Deposit Insurance
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 5, pages 1313–1333, December 1989
How to Cite
ACHARYA, S. and DREYFUS, J.-F. (1989), Optimal Bank Reorganization Policies and the Pricing of Federal Deposit Insurance. The Journal of Finance, 44: 1313–1333. doi: 10.1111/j.1540-6261.1989.tb02655.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits, and interest rate on deposits, the economy's risk-free interest rate, and the regulators' bank audit/administration costs. Under competitive conditions, the threshold assets-to-deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one. Optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank's risk on investment and nonincreasing in the bank's current assets-to-deposits ratio.