Levy Processes and the Financial Crisis: Can We Design a More Effective Deposit Protection?

Deposit Guarantee Schemes (DGSs) are financial institutions whose main aim is to provide a safety net for depositors. If a credit institution fails, depositors will be able to recover their bank deposits up to a certain limit. During the recent global financial crisis, DGSs were brought at the centre of the political and financial debate, especially due to the fact that the DGSs in the European Union Member States resulted in most of the cases incapable to react to the financial crisis, especially due to the lack of funds set aside. In the present paper we propose to use Levy processes to simulate the loss distribution of the amount of deposits insured by a DGS in case of banks’ failure. The simulated distribution of losses can be used to design an effective DGS. By simulating banks’ default and the corresponding losses, our model allows defining a target level for the funds to be collected by the scheme in order to promptly and effectively respond to financial turmoils and protect the citizens. The proposed approach is applied to a sample of Italian banks.

MACCAFERRI Sara;  CARIBONI Jessica;  SCHOUTENS Wim; 

2013-03-26

Sciedu Press

JRC67874

1923-4023 (print),    1923-4031 (online),   

http://www.sciedu.ca/journal/index.php/ijfr/article/view/2167,    https://publications.jrc.ec.europa.eu/repository/handle/JRC67874,   

10.5430/ijfr.v4n1p5,