Applying credit risk techniques to evaluate the adequacy of deposit guarantee schemes' fund

Deposit Guarantee Schemes (DGSs) are financial institutions whose main aim is to provide a safety net for depositors so that, if a credit institution fails, they will be able to recover their bank deposits up to a certain limit. The recent global financial crisis brought DGS at the centre of the political and financial debate. In July, 2010, the European Commission adopted a legislative proposal for an in-depth revision of the Directive on DGS, which aims at harmonizing and simplifying the schemes’ functioning. We propose to investigate some implications of the proposal, focusing in particular on the DGS financing mechanisms, by simulating the DGS loss distribution using the Gaussian one-factor model. The DGS is thus treated as a portfolio of banks whose default probabilities are estimated from CDS spreads. The proposed approach is applied to a sample of Italian banks.

MACCAFERRI Sara;  CARIBONI Jessica;  SCHOUTENS Wim; 

2011-10-14

Royal Flemish Academy of Belgium for Science and Arts (KVAB)

JRC66011

https://publications.jrc.ec.europa.eu/repository/handle/JRC66011,