Annals of Operations Research

, Volume 45, Issue 1, pp 243–264 | Cite as

Optimal bank portfolio choice under fixed-rate deposit insurance

  • Anlong Li


This paper analyzes the investment decisions of insured banks under fixed-rate deposit insurance. The model takes into account the charter value and allows banks to dynamically revise their asset portfolios. Trade-offs exist between preserving the charter and exploiting deposit insurance. The optimal bank portfolio problem is solved analytically for a constant charter value. In any audit period, banks maximize their risk exposure before some critical time and act cautiously thereafter. The corresponding deposit insurance is shown to be a put option that matures at this critical time rather than at the audit date.


Investment Decision Critical Time Risk Exposure Deposit Insurance Portfolio Choice 
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Copyright information

© J.C. Baltzer AG, Science Publishers 1993

Authors and Affiliations

  • Anlong Li
    • 1
  1. 1.Department of Operations Research, Weatherhead School of ManagementCase Western Reserve UniversityClevelandUSA

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