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Working Paper

The Changing Role of Banks and the Changing Value of Deposit Guarantees

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This article develops a model for pricing deposit guarantees. The model treats the bank’s investments as a portfolio of default-free bonds and risky loans. The risk of the loans is determined by individual firms’ financing and investment decisions. Pushing back risk to the level of the borrowing firms allows us to link deposit guarantees to specific characteristics of these loans, such as their durations, and to correlations between business risk and interest rates. Since the nature of bank loans has been changing over time, our model should predict the accompanying change in value of the government guarantees.
01.02.1995ISSN 2573-7953 WP 95-02DOI 10.26509/frbc-wp-199502

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Ritchken, Peter, James B. Thomson, and Ivilina Popova. 1995. “The Changing Role of Banks and the Changing Value of Deposit Guarantees.” Federal Reserve Bank of Cleveland, Working Paper No. 95-02. https://doi.org/10.26509/frbc-wp-199502