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In Rememberance: World Trade Center (WTC)

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Evaluating the Adequacy of the Deposit Insurance Fund: A Credit-Risk Modeling Approach

by Rosalind L. Bennett of the Federal Deposit Insurance Corporation

July 2002

Abstract: As part of an effort to measure risk effectively, the FDIC hired Oliver, Wyman & Company to develop a credit-risk model for the deposit insurance funds. I use the credit-risk model to estimate the FDIC's loss distribution; and I perform sensitivity analysis using different assumptions about the parameters of the model. The sensitivity analysis results in a range of possible credit ratings associated with the deposit insurance funds. Under one set of assumptions, the deposit insurance funds would not warrant a BBB rating, whereas under another set of assumptions the funds would warrant an A- rating. The model provides useful quantitative information on the risks to the deposit insurance funds. Given the sensitivity of the results to different assumptions, however, the model should be used with caution.

JEL Classification: G21, G28, G11, G33.

Keywords: Deposit insurance, Credit risk, Default risk.

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