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    Estimating Dual Deposit Insurance Premium Rates and Forecasting Non-performing Loans: Two New Models

    Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Nili, Farhad | January 2015
    Abstract
    Risky banks that endanger the stability of the financial system should pay higher deposit insurance premiums than healthy banks and other financial institutions that have shown good financial performance. It is necessary, therefore, to have at least a dual fair premium rate system. In this paper, we develop a model for calculating dual fair premium rates. Our definition of a fair premium rate in this paper is a rate that could cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting non-performing loans (NPLs), we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction setting. The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions some banks show negative performance or vice versa. Our final results show that stable banks should pay lower deposit insurance premium rates.
    Citation
    Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Nili, Farhad. 2015. Estimating Dual Deposit Insurance Premium Rates and Forecasting Non-performing Loans: Two New Models. © Asian Development Bank. http://hdl.handle.net/11540/3986. License: CC BY 3.0 IGO.
    Keywords
    Economic Development
    Economic Infrastructure
    Economic Policies
    Regional Economic Development
    Microfinance Programs
    Public Finance
    Local Financing
    Financial Stability
    Financial Sector Regulation
    Enterprises
    Financial aid
    Economies in transition
    Local Finance
    Local Government
    Insurance Companies
    Banks
    Social Equity
    Social responsibility of business
    Accounting
    Personal budgets
    Cost and standard of living
    Bank accounts
    Credit control
    Regulatory reform
    Banks and banking
    Show allCollapse
    Citable URI
    http://hdl.handle.net/11540/3986
    Metadata
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    PDF (1.428Mb)
    Author
    Yoshino, Naoyuki
    Taghizadeh-Hesary, Farhad
    Nili, Farhad
    Theme
    Economics
    Finance

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    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise