Front Matter Page
Monetary and Exchange Affairs Department
Authorized for distribution by David Marston
Contents
I. Introduction
II. The Value of Government Safety Nets for Bank Shareholders
A. Background
B. Asset Value Dynamics
C. Deposit Insurance Value Under an Equity Investment Opportunity Set
D. Deposit Insurance Value Under Alternative Bank Investment Opportunity Sets
E. Maturity-Matched Risky Discount Bonds
F. Long-Term Risky Discount Bonds
III. Buffer Stock Capital Allocation Using Value-at-Risk
IV. Using VaR to Calculate Capital in the Absence of Bank Safety-Net Protections
A. Market Risk Capital Allocation
B. Credit Risk Capital
Held-to-Maturity (HTM) Credit VaR Capital Allocation
Mark-to-Market (MTM) Credit VaR
V. Safety Net Insurance Value Under an Internal-Models Approach to Capital
VI. Bank Risk-Taking Incentives Under an Internal-Models Approach to Capital
A. Market Risk
B. Credit Risk
Held-to-Maturity (HTM) Internal Models Capital Requirement
Mark-to-Market (MTM) Internal Models Capital Requirement
VII. Conclusions
Text Table
1. Asset Volatility Levels that Maximize the Insurance Value for Alternative Market Prices of Risk
Figures
1. Deposit Insurance Value Under an Internal Model Market Risk Capital Requirement
2. Deposit Insurance Value per Dollar Invested Equity Under an Internal Model Approach to Market Risk Capital
3. Bond Characteristics and Credit Risk
4. Insurance Value Under an HTM Internal Model Capital Requirement
5. Insurance Value and the Market Price of Risk Under an HTM Internal Model Capital Requirement
6. Insurance Value of Required Equity Capital
7. Default Option Value in Dollars and Insurance Value of Bond Market Value Under a 1-Year MTM Capital Requirement on a 2-Year Bond
8. Insurance Value of Required Equity Under a 1-Year MTM Capital Requirement on a 2-Year Bond
9. Default Option Value in Dollars and Insurance Value of Bond Market Value Under a 1-Year MTM Capital Requirement on a 5-Year Bond
10. Insurance Value of Required Equity Under a 1-Year MTM Capital Requirement on a 5-Year Bond
References