Kuritzkes, Andrew, Til Schuermann, Scott M. Weiner, "Deposit Insurance and Risk Management of the U.S. Banking System: What is the loss distribution faced by the FDIC?", Journal of Financial Services Research, Vol. 27, No. 3, (September 2005), pp. 217-242.

Abstract: We examine the question of deposit insurance through the lens of risk management by constructing the loss distribution faced by the Federal Deposit Insurance Corporation (FDIC). We take a novel approach by arguing that the risk management problem faced by the FDIC is similar to that of a bank managing a loan portfolio, only in the FDIC’s case the risk arises from the potential for loss of the individual banks in its portfolio. We explicitly estimate the cumulative loss distribution of FDIC insured banks using two variations of the Merton model and find that reserves are sufficient to cover roughly 99.85% of the loss distribution, corresponding to about a BBB+ rating. However, under different stress scenarios (higher correlations, fat-tailed bank returns, increased loss severity) that level can be much lower: approximately 96% corresponding to about a B+ rating.

JEL Classification: G210, G280.

Keywords: Credit risk, loss distribution, value-at-risk.

Previously titled: Deposit Insurance and Risk Management of the US Banking System: How Much? How Safe? Who Pays?

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