Use the following information for questions
Consider a bank with federally insured deposits maturing in one year.The bank's asset value changes monthly and you have the following data on asset value for the past three months.Assume that the probability distribution of asset value changes remains stationary over time.The bank's current deposit to asset value ratio is 0.90. $$\begin{array} { | l | l | }
\hline \text { Month } & \text { Bank Asset Value } \
\hline 1 & \text { \$ } 105 \text { million } \
\hline 2 & \$ 101 \text { million } \
\hline 3 & \text { \$ 95 million } \
\hline
\end{array}$$
-What A is the cost of deposit insurance per dollar of insured deposits?

Question

Use the following information for questions
Consider a bank with federally insured deposits maturing in one year.The bank's asset value changes monthly and you have the following data on asset value for the past three months.Assume that the probability distribution of asset value changes remains stationary over time.The bank's current deposit to asset value ratio is 0.90. $$\begin{array} { | l | l | } 
\hline \text { Month } & \text { Bank Asset Value } \
\hline 1 & \text { \$ } 105 \text { million } \
\hline 2 & \$ 101 \text { million } \
\hline 3 & \text { \$ 95 million } \
\hline
\end{array}$$
-What A is the cost of deposit insurance per dollar of insured deposits?

Quizplus · Accepted Answer

The cost of deposit insurance per dollar of insured deposits can be estimated by calculating the expected loss to the insurer. Given the deposit to asset value ratio of 0.90, the bank is at risk of default when its asset value falls below its deposit obligations. The average asset value over the three months is $(105 + 101 + 95) / 3 = 101$ million. With a 0.90 deposit to asset ratio, the deposits are $101 * 0.90 = 90.9$ million. The changes in asset value are -$4 million (from $105 million to $101 million), and -$6 million (from $101 million to $95 million), indicating a risk of decrease in asset value. Assuming a linear risk of decrease, the average decrease is $(-4 - 6) / 2 = -5$ million. The expected loss on a $90.9 million deposit base due to a $5 million decrease in asset value is $5 million / $90.9 million = $0.055 per dollar of insured deposits, but this calculation does not directly lead to the correct answer because it doesn't account for the probability distribution and the actual calculation method for insurance cost. The correct answer must be derived from understanding the insurance cost calculation, which typically involves assessing the probability of default and the loss given default, neither of which are directly provided here. Without explicit probabilities or a clear method to calculate expected loss, the answer cannot be directly calculated from the information given, suggesting a need for an assumption or a standard method of calculation in banking for deposit insurance cost that isn't fully detailed in the question. The correct choice, therefore, is based on an understanding of the banking and insurance principles rather than a straightforward calculation from the provided data.

Use the Following Information for Questions Consider a Bank with Federally

Use the Following Information for Questions
Consider a Bank with Federally