Working Paper No. 29
By David Maude and William Perraudin
The valuation of bank deposit guarantees depends crucially on the point at which troubled financial institutions are closed. Under different assumptions about regulatory policies, we use data on the equity value and deposits of eight large UK banks to value their deposit insurance. The models we implement include standard Merton-style audit models of deposit guarantee valuation, an endogenous closure rule model, and a model with endogenous subsidies in which equity-holders remain in control of the financially troubled bank.