Capital standard, forbearance and deposit insurance pricing under GARCH

We propose a multiperiod deposit insurance pricing model that simultaneousl y incorporates the capital standard and the possibility of forbearance. The model employs the recently developed GARCH option pricing technique in det ermining the deposit insurance value. Our model offers two distinctive adva ntages. First, it explicitly considers the implications of the strict enfor cement on capital standard as stipulated in FDIC Improvement Act of 1991. S econd, the use of the GARCH model;allows us to capture many robust features exhibited by financial asset returns. By the GARCH option pricing theory, the value of a contingent claim is a function of the asset risk premium. Th is unique feature is found to be prominent in determining the bank's deposi t insurance value. We also examine the effects of capital forbearance and m oral hazard behavior in this multiperiod deposit insurance setting. (C) 199 9 Elsevier Science B.V. All rights reserved.