Due to the option feature of the deposit insurance, a higher deposit insurance premium should be imposed on

Question

Quizplus · Accepted Answer

Banks with low capital to total assets ratio and high volatility of asset values are more likely to default, and therefore pose a higher risk to the deposit insurance fund. The option feature of the deposit insurance means that the fund may need to pay out more if these banks default, so a higher deposit insurance premium is appropriate to offset this risk. Banks with high interest rate risk, high liquidity risk, or low loan loss reserves may also pose risks to the fund, but these factors are not directly related to the option feature of the deposit insurance. Banks with high capital to total assets ratio and low volatility of asset values are less likely to default and pose a lower risk to the deposit insurance fund, so a lower premium may be appropriate for these banks.

Due to the Option Feature of the Deposit Insurance, a Higher