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Deposit Insurance and Risk Management of the U.S. Banking System: What is the Loss Distribution Faced by the FDIC?

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Abstract

We examine the question of deposit insurance through the lens of risk management by constructing the loss distribution faced by the Federal Deposit Insurance Corporation (FDIC). We take a novel approach by arguing that the risk management problem faced by the FDIC is similar to that of a bank managing a loan portfolio, only in the FDIC’s case the risk arises from the potential for loss of the individual banks in its portfolio. We explicitly estimate the cumulative loss distribution of FDIC insured banks using two variations of the Merton model and find that reserves are sufficient to cover roughly 99.85% of the loss distribution, corresponding to about a BBB+ rating. However, under different stress scenarios (higher correlations, fat-tailed bank returns, increased loss severity) that level can be much lower: approximately 96% corresponding to about a B+ rating.

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Author information

Authors and Affiliations

  1. Mercer Oliver Wyman, USA

    Andrew Kuritzkes

  2. Wharton Financial Institutions Center, Federal Reserve Bank of New York, USA

    Til Schuermann

  3. University of Oxford, UK

    Scott M. Weiner

  4. Federal Reserve Bank of New York, 33 Liberty St., New York, NY, 10045, USA

    Til Schuermann

Authors
  1. Andrew Kuritzkes
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  2. Til Schuermann
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  3. Scott M. Weiner
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Corresponding author

Correspondence to Til Schuermann.

Additional information

JEL classification: G210, G280.

Any views expressed represent those of the author only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

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Kuritzkes, A., Schuermann, T. & Weiner, S.M. Deposit Insurance and Risk Management of the U.S. Banking System: What is the Loss Distribution Faced by the FDIC?. J Finan Serv Res 27, 217–242 (2005). https://doi.org/10.1007/s10693-005-1802-2

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  • DOI: https://doi.org/10.1007/s10693-005-1802-2

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