Credit Risk Models: An Application to Deposit Insurance Pricing

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Credit Risk Models: An Application to Deposit Insurance Pricing

by Aurelio Maccario of the Unicredit Banca Mobiliare & Università LUISS-Guido Carli,
Andrea Sironi of the Università Luigi Bocconi, and
Cristiano Zazzara of Fondo Interbancario di Tutela dei Depositi & Università LUISS-Guido Carli

January 2003

Abstract: The Federal Deposit Insurance Corporation (FDIC) has recently tested credit risk measurement models used by large international banks to measure the risk of their portfolios in order to measure the risk of default of its insured banks' deposits. Using both balance sheet and equity market data for a sample of 15 large Italian banks, this study applies some of these models to value both individual and portfolio default risks for a deposit insurance agency. The empirical analysis allows to estimate the loss probability distribution which in turn can be used to: (i) evaluate the capital adequacy of the deposit insurance agency; (ii) estimate the marginal contribution to the whole portfolio risk of a single insured bank; (iii) identify a formula for deposit insurance pricing, as an alternative to the one based on option pricing models. Such a formula based on a value-at-risk framework enables a more accurate risk quantification.

JEL Classification: G21, G28, G11, G33.

Keywords: Credit Risk, Bank crisis, Deposit insurance, Value at Risk.

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