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Designing sound deposit insurances

Assa, H., Okhrati, R. (2018) Designing sound deposit insurances. Journal of Computational and Applied Mathematics, 327 . pp. 226-242. ISSN 0377-0427. (doi:10.1016/j.cam.2017.05.043) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:87565)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1016/j.cam.2017.05.043

Abstract

Deposit insurances were blamed for encouraging the excessive risk taking behavior during the 2008 financial crisis. The main reason for this destructive behavior was “moral hazard risk”, usually caused by inappropriate insurance policies. While this concept is known and well-studied for ordinary insurance contracts, yet needs to be further studied for insurances on financial positions. In this paper, we set up a simple theoretical framework for a bank that buys an insurance policy to protect its position against market losses. The main objective is to find the optimal insurance contract that does not produce the risk of moral hazard, while keeping the bank's position solvent. In a general setup we observe that an optimal policy is a multi-layer policy. In particular, we obtain a close form solution for the optimal insurance contracts when a bank measures its risk by either Value at Risk or Conditional Value at Risk. We show the optimal solutions for these two cases are two-layer policies. © 2017 Elsevier B.V.

Item Type: Article
DOI/Identification number: 10.1016/j.cam.2017.05.043
Uncontrolled keywords: Contracts; Deposits; Risk assessment; Risk management; Value engineering, Conditional Value-at-Risk; Deposit insurances; Moral hazard; Multi-layer policies; Risk measures; Risk-taking behaviors; Solvency; Theoretical framework, Insurance
Subjects: H Social Sciences
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Hirbod Assa
Date Deposited: 29 Apr 2021 11:34 UTC
Last Modified: 04 Feb 2022 13:27 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/87565 (The current URI for this page, for reference purposes)
Assa, H.: https://orcid.org/0000-0002-4429-8684
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