Bridging the Gap between the Deposit Insurance Fund Target Level and the Current Fund Level

Abstract

We develop a model of deposit insurer choices for pricing deposit insurance, determining the target insurance fund, resolving bank failures and managing insurer investments. The academic literature and law treat these four areas as separate processes. Deposit insurers’ experience, however, shows there are trade-offs between these operations. We use a risk aggregation model (copula) to combine multiple insurer revenue and expense streams. We apply ruin theory, common to insurance literature but not previously used for deposit insurers, to these streams to study target fund estimates and insurer insolvency risk. Our results suggest a target fund for the FDIC (as an example) of $98 billion as of year-end 2019 based on a 99.97 percent confidence level for fund solvency; the official FDIC target fund is $150 billion as of year-end 2019. Next, we test alternative scenarios for achieving a target fund and show changes in probability of ruin and fund capital under various funding strategies a deposit insurer could employ.