Analyzes The Journal

Comparing Insurance Costs for Time and Demand Deposits

· Theme : Time Deposit

· Title : Comparing Insurance Costs for Time and Demand Deposits

· Author :

1. Gongmeng Chen

Department of Accountancy, The Hong, Kong Polytechnic University

2. Mandy Li

School of Business and Administration, Open University of Hong Kong

· Year Published: -

INTRODUCTION

At present, some form of deposit insurance exists in the following Asian and Pacific-Rim countries: the United States, Canada, Japan, Taiwan, India, and the Philippines. Countries in the same region with no deposit insurance include China, Australia, New Zealand, Malaysia, Singapore, Indonesia, and Hong Kong. On balance, deposit insurance seems to be gaining acceptance around the globe.

PROBLEM

This study analyzes the differential risks imposed by time deposits and demand deposits on the deposit insurer

PURPOSE

This paper applies option pricing theory to compare the insurance costs for time and demand deposits

METHODOLOGY

This paper uses Margrabe's (1978) exchange option approach to model deposit insurance costs, but treats time and demand deposits differently.

· Dependent Variable : Time and Demand Deposit

· Independent Variable : Insurance Cost

RESULT AND ANALYSIS

The simulation results show that the insurance cost of time deposits is much larger than that of demand deposit insurance. However, such discrepancy narrows when the deposit-to-assets ratio and/or volatility rise. this is an extreme assumption and will make demand deposits appear less costly to insure than they are. Consequently, the results are somewhat exaggerated regarding the difference in fair insurance premium between the two types of deposit.

CONCLUSION

This study shows that demand deposits impose a lower level of risk than time deposits on the insurer and consequently justify a lower insurance premium than do time deposits. This finding is consistent with the fact that banks are more conservative in lending the proceeds of demand deposits since they have to prepare for the withdrawal of demand deposits at any time.

Analyzer : Samuel David Lee