Does China Require an Explicit Deposit Insurance System?

Transcription

1 Journal of Appled Fnance & Bankng, vol. 6, no., 016, ISSN: (prnt verson), (onlne) Scenpress Ltd, 016 Does Chna Requre an Explct Depost Insurance System? Fu Shuen She 1 Abstract Ths study ndcates that there s no explct evdence supportng the fact that banks n Chna lack strength and are exposed to the rsk of bankruptcy. That s, the fnancal ndustry structure n Chna s healthy and an ncreased nvestment and facltes n ths ndustry should be consdered. However, the emprcal results of the depost nsurance prcng model show that t s necessary to establsh a depost nsurance system for the banks n Chna as all the estmated depost nsurance premums are sgnfcantly postve. It s suggested, therefore, that an explct depost nsurance system should be ntroduced n Chna. Wthout establshment, the cost that should be borne by the banks wll be shfted to the publc and thus lower the operaton costs of banks. JEL classfcaton numbers: G14, G15, G1 Keywords: Chna, depost nsurance system, fnancal dstress, opton prcng model, Z- Score 1 Introducton Accordng to nformaton from the Internatonal Assocaton of Depost Insurers (IADI), up to 30 September 010, there are 106 countres adoptng an explct depost nsurance system (EDIS) and 19 countres, ncludng Chna, are currently consderng establshng an EDIS. An EDIS provdes the functon of protectng the benefts of depostors wth the ultmate goal beng to stablze the fnancal system. It must be assessed, however, whether or not the fnancal system n Chna s unstable and lkely to experence fnancal dstress. Also, does Chna even requre an EDIS? These questons are nvestgated n ths study. Snce the majorty of depost accounts n Chnese banks belong to small depostors, f a 1 Department of Fnance, Natonal Tachung Unversty of Scence and Technology No. 19 Sec. 3, Sanmn Road, Tachung Cty 404, Tawan, R.O.C. Artcle Info: Receved : January 10, 015. Revsed : January 31, 015. Publshed onlne : March 1, 016 IADI, Depost Insurance Systems.

2 18 Fu Shuen She bank s on the brnk of bankruptcy, t may nduce panc amongst these small depostors that may cause a bank run. Such a crss could affect the confdence of the depostors of other fnancal nsttutons and provoke a Domno effect. Such consequences can affect the stablty of a bankng system and lead to fnancal crses. Ths means that, the rsk assocated wth an ndvdual bank can develop nto the systematc rsk of the ndustry and, as a result, wll not just effect depostors, but can also lead to economcal and socal fluctuaton. Therefore, protectng the benefts of depostors s always a concern to governments of dfferent countres. Ths ssue s especally urgent n Chna as t s now n the perod of transformaton. As a result, as t s a crucal topc for Chna, the motvaton of ths study s how to fully utlze an EDIS. Snce 007, the subprme mortgage crss n the US has provded a good example that has llustrated how a well-developed EDIS has a huge effect on mprovng publc confdence n fnancal nsttutes, reducng fnancal rsk, protectng depostors benefts, establshng effcent ext market mechansms and mantanng fnancal safety. The nternatonal experence of the US demonstrates that a well-desgned EDIS s benefcal to the stablty of a fnancal system. EDIS, however, does also brng wth t moral hazard ssues (Laeven, 00) and the core problem s whether or not the prcng of depost nsurance premums are far (VanHoose, 007). A far and reasonable depost nsurance premum should not only reflect the rsk of banks accurately, but also restran the banks moral hazard effectvely, mprove the market and avod cross subsdzaton between banks. Therefore, we should dscuss the matter n two dfferent parts the frst beng the predcton of fnancal dstress and the second beng the prcng of depost nsurance. Snce Beaver (1966) and Altman (1968) appled the multple dscrmnant analyss to construct the fnancal dstress predcton model, there were many papers that amed to explore corporate fnancal dstress and construct the dstress predcton model. The purpose s to predct the occurrence of fnancal dstress of a company, no matter whether we analyze the crss factors or use other predcton methods. Altman (1968) developed a corporate bankruptcy predcton model wth hgh accuracy, wth the accuracy of ths model stll beng relatvely hgh despte beng appled for thrty years. Afterward, Altman (000) appled Z-Score model agan to test ts valdty. He took the samples between 1969 and 1999 and used.675 as the crtcal value to test the long-term predcton of corporate dstress at one year pror to bankruptcy. The results show that the accuracy of the samples between and are 85% and 94% respectvely. It llustrates that, even though the Z-Score model has been appled over 30 years, t stll retans ts ntegrty and hgh accuracy. Snce then, there have been varous dentfcatons of the varables and extensons of the model. Altman (1993) computes the Z-score based on workng captal, total assets, earnngs before nterest and taxes, sales, and other fnancal varables. For the ndustry of fnancal ntermedaton, Edmster and Schlarbaum (1974), Snkey (1975, 1977), Martn (1977), Santomero and Vnso (1977), Pettway and Snkey (1980) dscussed the ssue on the bankng ndustry, whle Altman (1977) dd on savngs and loan nsttutons Except for the multple dscrmnant analyss, Z-score has also been renovated nto Dstance-to-default rato. Ths rato measures the market value of a bank s assets n relaton to the book value of ts labltes. (Boyd and Runkle, 1993; De Ncoló et al., 004; Uhde and Hemeshoff, 009). Gropp, Vesala and Vulpes (00) show that an unbased equtybased fraglty ndcator, a Z-score, can be derved from a Black-Scholes (1973) type of opton-prcng model. The larger the Dstance-to-default rato, the lower the probablty of bankruptcy. Lu, Papakrykos, and Yuan (006) used the Canadan banks as example and

3 Does Chna Requre an Explct Depost Insurance System? 19 found that ther dstance-to-default ratos are relatvely hgh and, therefore, have a very low nsolvency rsk. These cases llustrate the wdespread usage of Z-score. Ths paper, however, s not gong to examne the accuracy of Z-Score model on the predcton of banks n Chna. In fact, ths model s treated as a sutable dstress predcton model and hence wll be appled to nvestgate f banks n Chna have any fnancal. Moreover, for the prcng of depost nsurance, snce Merton (1977) suggested the European put opton prcng, other scholars have developed many revsed models and new opton prcng model (OPM). For example, Ronn and Verma (1986) consdered the nfluence of captal forbearance. Kerfrden and Rochet (1993) proposed the stochastc nterest rates model. Duan and Yu (1994) analyzed the multperod framework model. Duan and Yu (1999) appled the model of Generalzed Autoregressve Condtonal Heteroskedastcty (GARCH) and, dvergng from the European put opton prcng, extended the volatlty of asset prcng nto stochastc volatlty. Furthermore, Allen and Saunders (1993) not only analyzed the captal forbearance of the depost nsurance company, but also examned the two factors that may cause early exercse of the opton. These ncluded the regulatory closure polcy of the FDIC and the self-closure pont of nsured banks based on the banks self nterest, and suggested the callable perpetual Amercan put opton to assess the premum of depost nsurance. On the other hand, Hwang et al. (009) examned the cost of bankruptcy and re-confrmed the captal forbearance 3, proposed that the polcy of selfclosure does not exst and suggested the Barrer opton for prcng depost nsurance. Ths study ams to apply the three dfferent opton prcng models (OPMs) from Merton (1977), Allen and Saunders (1993) and Hwang et al. (009) as the emprcal models. The other models extended from Merton (1977) would provde smlar conclusons under the settng of ths study wthout the loss of generalty. The remander of ths paper s organzed as follows: Secton Methodology and Hypothess. Secton 3 Data and Emprcal results. Secton 4 Concluson and suggestons. Methodology and Hypothess Altman (1968) appled multple dscrmnant analyss (MDA) to predct f a frm s gong to go bankrupt. The varables are classfed nto fve standard rato categores ncludng lqudty, proftablty, leverage, solvency and actvty ratos. Among these varables, 5 representatve ratos are selected from fnancal ratos to construct the followng dscrmnant functon 4 : Z nt 0.01X X 0.033X X X 5 (1) where X1 workng captal / total assets X retaned earnngs / total assets 3 Kane (1986) stated that consderng the cost of montorng, FDIC would further forbear the banks beyond the orgnal condton of captal forbearance. Also, Allen and Saunders (1993) at note 1 explaned that captal forbearance s the case where FDIC does not execute the regulatory closure pont under the known stuaton. 4 The man results are unchanged n Altman (1993) models.

4 130 Fu Shuen She X 3 X 4 X 5 Z nt earnngs before nterest and taxes / total assets market value equty / book value of total labltes sales / total assets overall ndex Snce there s no nformaton on bankruptcy of Chnese banks, the am of ths study s not to examne the accuracy of predcton of Eq. (1). Instead, the equaton s treated as a proper dstress predcton model and hence appled to assess whether there s any fnancal rsk to the banks n Chna. In ths paper, the Z-Score of each bank n each year wll be calculated. Z Z Tn n t 1 Nt t n 1 Z Z nt nt / T n / N t s the number of samples for bank n, s defned as the average Z-Score of bank n over tme and s defned as the average Z-Score of all the banks n year t, where N t s the number of samples of the banks n year t. The followng are the hypotheses accordng to ths settng and the model of Eq. (1): Hypothess 1 (H1): at year t, the observed samples ndcate that the banks n Chna have potental fnancal dstress,.e., to test whether Z t s less than.675. Hypothess (H): the observed samples ndcate that bank n has potental fnancal dstress,.e., to test whether Z n s less than.675. As dscussed n the prevous secton, ths study wll apply varous OPM models to calculate the depost nsurance premum for the banks n Chna and examne f Chna requres the establshment of an EDIS. Frst, to apply OPM on the prcng of depost nsurance premum, Merton (1977) proposed usng European put opton prcng. The value of the opton at maturty s (0, D-A T) + = max(0, D-A T) where A T s the prce of the bank s asset at tme T, D s the total depost whch s the face value of the bank debt, that, n the OPM settng, s the strke prce. In ths paper, we standardze the bank s asset to total depost rato,.e., at tme t, under a gven bank asset to debt rato a t = A t /D, the exercse prce of the opton s 1. At the same tme, A t should be assumed as stochastc. Accordng to Merton (1977), the prce of the bank s asset to debt rato s assumed to follow the geometrc Brownan moton 5 as shown below: dln A dt, () t dw t where μ s the nstantaneous expected return on assets, σ s the nstantaneous expected standard devaton of asset returns, and W t s the standard Brownan moton. However, rsk-neutral transformaton should be preformed on Eq. () for opton prcng. Q The calbraton of densty transformaton s dw dw ( r dt, and hence, the t t ) process of the bank s asset to debt rato after rsk adjustment s: T n 5 For smplcty, ths paper assume that dvdends are zero.

5 Does Chna Requre an Explct Depost Insurance System? 131 d lna rdt Q t dw t, (3) For Eq. (3), the prcng of depost nsurance under the structure of the European put opton n Merton (1977) s as follows: Merton ( a 0, T; 1) = ( h1 T) a0( h1 ), (4) where ln 1/ a0 0.5 h1 T T, and Φ( ) s the cumulatve densty of a standard normal random varable. Moreover, Allen and Saunders (1993) beleved that the prevous papers dd not suffcently consder the characterstcs of depost nsurance. After examnng the captal forbearance, regulatory closure polcy and self-closure pont, they proposed usng callable perpetual Amercan put opton to assess the value of depost nsurance. The ntrnsc value of the opton for early exercse wthn the duraton s (0, D-A t) +, and hence, the assessment of the value of depost nsurance can be derved as: a AS 0 1 ( a 0, ; 1) = (1 a )( ), (5) a where a AS s the regulatory closure pont, and r 1 /. The resultng premum values, ( a 0, ; 1), are treated as lump-sum perpetutes and multpled by a quarterly yeld rate to derve an equvalent quarterly payment amount. Fnally, Hwang et al. (009) appled the structure n Allen and Saunders (1993) to analyze the cost of bankruptcy and derved the value of the depost nsurance premum as: a (1 k a a)( ), (6) a AS 0 1 bc ( a 0, ; 1) = where AS bc s the depost nsurance premum n Allen and Saunders model wth the consderaton of bankruptcy cost, k a s the dscount factor under regulatory closure pont,.e., the cost of bankruptcy (1- k a ) a, n whch 0 k a 1, to be taken nto account by the FDIC f the FDIC executes ts authorty. After nvestgatng the regulatory closure polcy of FDIC, Hwang et al. (009) extended the OPM prcng method further and suggested that the regulatory closure polcy s just the lower bound of the threshold of the barrer opton. Under the settng of Eq. (3), the depost nsurance premum can be derved as: MDOP rt Q bc ( a 0, T; 1) e E k a1 { ~, (7) 1 a a a } T

6 13 Fu Shuen She MDOP bc where s the modfed down-and-out put opton (MDOP) whch s the depost nsurance premum wth the consderaton of bankruptcy cost and a~ T m n a. Wth the former assumptons, the closed-form soluton s: MDOP bc where ( a 0, T; 1) ln a / a0 ( r 0.5 ) T h, T lna / a0 ( r 0.5 ) T h3, T r 1. rt 1 k ae h a / a h a 0 3 0sT, (8) On the other hand, accordng to Ronn and Verma (1986), there are two parameters, A 0 and σ, that have to be estmated pror to complng the depost nsurance premum usng Eq. (4), Eq. (5), and Eq. (8). These two parameters can be estmated by the followng two non-lnear equatons: E A0 ( h4 T ) ad( h4 ), (9) and E E, (10) A 0 ( h 4 T ) where ln A ad 0 / 0.5 T h4, T E s the equty of the bank and E s the nstantaneous standard devaton of the return on E. As dscussed n the former sesson, regardless of whether we use the models of Merton (1977), Allen and Saunders (1993) or Hwang et al. (009), there exsts a closed-form soluton of the stochastc process of Eq. (3). Ths study wll determne the depost nsurance Merton AS MDOP premum under dfferent OPMs,.e.,,, and, by applyng the emprcal method. In ths paper, m n Tn m t 1 nt premum of bank n for each quarter and / T s defned as the average depost nsurance n m t Nt m n 1 nt / N t s defned as the average depost nsurance premum of all the banks n quarter t, where m Merton, AS, and MDOP, and bankruptcy cost s not taken nto account,.e., k a s assumed to be 1 ( k a 1). Ths s because, f the hypothess s accepted n the latter analyss wthout consderng bankruptcy s

7 Does Chna Requre an Explct Depost Insurance System? 133 cost, then the same concluson can be drawn even wth bankruptcy cost. Therefore, referrng to the former emprcal fndngs, we can test each bank or the banks n each year and estmate whether the depost nsurance premum dffers from zero. If the estmate s greater than zero, t means costs that should be borne by banks n Chna have been shfted to the publc. On the other hand, t means an EDIS should be establshed for these banks n order to remove the cost borne by the publc. Therefore, the assumpton for ths paper s as follows: Hypothess 3 (H3): The depost nsurance system should be establshed n quarter t n order to transfer the cost back to the banks nstead of shftng the cost to the publc,.e., to test whether s greater than 0. m t Hypothess 4 (H4): Snce the bank n has been lsted, t dd not pay for ts payable depost nsurance premum and hence ts operaton cost s under-estmated,.e., to test whether s greater than 0. In the next part of ths paper, we wll make use of the nformaton of 14 lsted banks n Chna to test the mentoned hypotheses and hence prove whether Chna requres an EDIS and f there s any potental fnancal dstress. m n 3 Data and Emprcal Results Ths study takes Chnese banks whch were lsted n the thrd quarter of 009 as the research sample and manly uses the nformaton of each bank after ts lstng. Snce some banks were lsted n the early days, nformaton n early perods s unable to be obtaned. For example, the IPO date of Shenzhen Development Bank Co. s 1991/4/3 but the earlest quarterly data that can be obtaned s from quarter one of 00. The data sources of ths study are the Shangha Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) whle the research perod s from the lstng date of each bank to quarter three of 009. The lstng date and perod of research data s shown n Table 1.

8 134 Fu Shuen She Table 1: The lstng schedule of Chnese banks and the research perod Bank IPO date Code Perod Chna Mnsheng Bankng Co. 000/1/19 CMSB 001q1~009q3 Shangha Pudong Development Bank Co. Ltd. 1999/11/10 SPDB 001q3~009q3 Shenzhen Development Bank Co. 1991/04/03 SHDB 00q1~009q3 Chna Merchants Bank Co. 00/04/09 CMCB 00q3~009q3 Hua Xa Bank Co. Ltd. 003/09/1 HXB 003q4~009q3 Bank Of Chna Ltd. 006/07/05 BC 007q1~009q3 Industral & Commercal Bank Of Chna Ltd. 006/10/7 ICB 007q1~009q3 Industral Bank Co. Ltd. 007/0/05 IB 007q~009q3 Bank of Communcatons Co. Ltd. 007/05/15 BCC 007q3~009q3 Chna Ctc Bank Corp. Ltd. 007/04/7 CCTB 007q3~009q3 Bank Of Bejng Co. Ltd. 007/09/19 BBJ 007q4~009q3 Bank Of Nngbo Co. 007/07/19 BNB 007q4~009q3 Bank Of Nanjng Co. Ltd. 007/07/19 BNJ 007q4~009q3 Chna Constructon Bank Corp. 007/09/5 CCSB 007q4~009q3 Note: 00q1 represents quarter 1 of 00 and so on. Table 1 s ranked by perod and from t we can fnd that amongst all the collected data, the nformaton for 007 and 008 s the most ntegrated. Therefore, testng for H1 and H usng data from 007 and 008 would provde more relevant results. Frst, when testng H1 and H, the sample used s annual data. Then, the Altman Z-Score s calculated for each bank by year and tested aganst the hypotheses mentoned prevously. Snce the 5 representatve fnancal ratos proposed by Altman s not the focus of ths study, the summary statstcs of these 5 varables are not reported. The results of the tests are shown n Table.

9 Does Chna Requre an Explct Depost Insurance System? 135 Table : Altman Z-Score of the banks n Chna Year Bank Test of H1 CMSB SPDB SHDB CMCB HXB BC ICB IB BCC CCTB BBJ BNB BNJ CCSB Mean Std t-value p-value Mean Std All samples t-value Mean Std t-value p-value p-value Note: Words n bold ndcate sgnfcance at least at the 0.1 level. Test of H

10 136 Fu Shuen She Table ndcates that when testng aganst H1 or H, all the results do not support the hypotheses of H1 and H and they are sgnfcant at the 0.1 level. In other words, fnancal rsk does not exst amongst the banks n Chna. Table also shows that the average values of Altman Z-Score for all the banks n 007 and 008 are and respectvely and both of them are sgnfcant at the 0.01 level. The average value of Altman Z-Score for 008 s hgher than that for 007 mplyng that the banks n Chna were not affected by the global subprme mortgage crss and ther fnancal condton became even more stable. The result also ndcates that Chna s now an mportant feld whch all foregn banks want to seze. However, due to the defcency of the nsttutons and legal system, foregn banks are often earnng less proft than the Chnese banks. Therefore, results not supportng H1 and H do not mean that Chna does not requre an EDIS. We wll then apply the depost nsurance prcng model from Merton (1977), Allen and Saunders (1993) and Hwang et al. (009) to examne the essentalty of an EDIS n Chna. Dfferng from the characterstcs of data for calculatng Altman Z-Score, quarterly data s used to calculate depost nsurance premum. The results of depost nsurance premum for Merton, AS, and MDOP are consoldated n Table 3, Table 4 and Table 5. In these tables, the unt of depost nsurance premum per dollar s the bass ponts (bps) and a 0.97.

11 Does Chna Requre an Explct Depost Insurance System? 137 Test of H4 Table 3: Depost nsurance premum for the banks n Chna, Quarter Bank Test of H3 CMSB SPDB SHDB CMCB HXB BC ICB IB BCC CCTB BBJ BNB BNJ CCSB Mean Std t-value p-value 001q N.A. N.A. N.A. 001q N.A. N.A. N.A. 001q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q Mean Std All samples t-value Mean Std t-value p-value p-value Merton Note: 00q1 represents quarter 1 of 00 and so on. Words n bold ndcate sgnfcance at least at the 0.1 level. (bps)

12 138 Fu Shuen She Test of H4 Table 4: Depost nsurance premum for the banks n Chna, Quarter Bank Test of H3 CMSB SPDB SHDB CMCB HXB BC ICB IB BCC CCTB BBJ BNB BNJ CCSB Mean Std t-value p-value 001q N.A. N.A. N.A. 001q N.A. N.A. N.A. 001q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q Mean Std All samples t-value Mean Std t-value p-value p-value Note: 00q1 represents quarter 1 of 00 and so on. Words n bold ndcate sgnfcance at least at the 0.1 level. AS (bps)

13 Does Chna Requre an Explct Depost Insurance System? 139 Test of H4 Table 5: Depost nsurance premum for the banks n Chna, Quarter Bank Test of H3 CMSB SPDB SHDB CMCB HXB BC ICB IB BCC CCTB BBJ BNB BNJ CCSB Mean Std t-value p-value 001q N.A. N.A. N.A. 001q N.A. N.A. N.A. 001q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q Mean Std All samples t-value Mean Std t-value p-value p-value MDOP Note: 00q1 represents quarter 1 of 00 and so on. Words n bold ndcate sgnfcance at least at the 0.1 level. (bps)

14 140 Fu Shuen She From the above tables, t can be found that the results for Merton and MDOP are exactly the same except for quarter 3 of 009. In the tests aganst H3, the results support the hypothess snce quarter 4 of 007 meanng that DSI should be establshed for banks n Chna n order to transfer the cost back to them nstead of the cost beng borne by the publc. Moreover, n the tests aganst H4, apart from ICB and CCSB, the operaton costs of all the other 1 banks are under-estmated. In Table 4, the results of support both H3 and H4. Besdes those results, there s a queston of how to establsh a hgh-qualty EDIS. The study suggested that the focus of an EDIS should be on the ext mechansm for banks wth serous problems and on the brnk of bankruptcy. Also, the legslaton of depost nsurance systems s another key ssue as t may provde the legal ground for assstng banks, gudng the process of bankruptcy and preventng the msuse of forbearance polcy. Furthermore, the standard devaton of all samples ndcates that the dscreton power of the model of Allen and Saunders (1993) s the lowest as ts result s bps, far lower than the bps from the model of Merton (1977) and bps from the model of Hwang et al. (009). Smlar results can also be found n Table 6. The results of depost nsurance premum for AS Merton, AS, and MDOP are consoldated and expressed as quantle n Table 6 n order to support the suggestons of the EDIS establshment n Chna as proposed. Table 6: Quantle of depost nsurance premum for the banks n Chna (bps) Quantle Merton AS MDOP mn max As mentoned, the results n Table 6 demonstrate that calculaton usng the model of Allen and Saunders (1993) provded a range of depost nsure prema that s very small. For example, 0.9 quantle s hgher than the 0.1 quantle by only.3365bps. Accordng to the current assessment rate schedule ssued by the Federal Depost Insurance Corporaton (FDIC), the dfference between the hghest and lowest total base assessment rate s 70.5bps. Apparently, the Allen and Saunders (1993) model s not an approprate standard for depost nsurance prcng. 4 Concluson and Suggeston Frst, accordng to the emprcal results, up to 008, there s no rsk of bankruptcy for Chnese banks. Moreover, Chnese banks were not affected by the global subprme mortgage crss n 007 and 008, and ther fnancal condton became even more stable. Ths ndcates that the structure of the Chnese fnancal ndustry s very healthy and,

15 Does Chna Requre an Explct Depost Insurance System? 141 therefore, t s worthwhle to nvest n the ndustry and set up offces. However, ths does not mply that Chna does not requre a depost nsurance system. On the other hand, the results that support H3 and H4 mpled that the operaton costs of Chnese banks are under-estmated and, as result, Chna really needs to establsh an EDIS promptly. Though, practcally, the mplct DIS (IDIS) has been operated all the way, such a stuaton was created by the unqueness of the Chnese bankng ndustry. In Chna, banks are actually natonal banks. The government controls and owns the banks drectly or ndrectly and s the bggest owner of Chnese banks. It s nevtable that the government would nterfere and get nvolved nto the normal operatons of these banks. Therefore, f there were any problem wth the bank s assets, t would be rectfed by the government. Ths, obvously, s an unreasonable phenomenon as the rsks of the banks are, n fact, borne by the publc. Fnally, there are some suggestons about the establshment of EDIS: a. There are two common types of EDIS. The frst one s to set up and run the EDIS through the government, such as the FDIC and the Canada Depost Insurance Corporaton (CDIC). The second one s to set up the EDIS by the government and the banks, just lke the Depost Insurance Corporaton of Japan (DICJ). Accordng to the poltcal system n Chna, t s suggested that the depost nsurance nsttuton should be set up and run by the government. b. Determnaton of depost nsurance premum: t s recommended to refer to the settng of the range by Merton (1977) and Hwang et al. (009) n Table 6, or the current assessment rate schedule publshed by the FDIC. c. Internatonal Monetary Fund (IMF) suggested to members that the maxmum settlement of clams should be set at around double of per capta GDP. However, data shows that the 009 per capta GDP n Chna s only USD3,678. Accordng to IMF s recommendaton and the exchange rate at that tme, the amount s only around CNY50,000 whch, obvously, s too low n Chna. Snce one of the reasons of an EDIS s to protect small depostors, t s recommended that the maxmum amount of settlement of clams should be set at 99% of the depost n the accounts of such depostors. ACKNOWLEDGEMENTS: The author thanks the fnancal support of Mnstry of Scence and Technology (MOST) of the Republc of Chna (Tawan) to ths work under Grant Nos. MOST H References [1] Allen, L. and Saunders, A., Forbearance and Valuaton of Depost Insurance as a Callable Put. Journal of Bankng and Fnance, 17, (1993), [] Altman, E.I., Fnancal Ratos, Dscrmnant Analyss and the Predcton of Corporate Bankruptcy, Journal of Fnance, 3(4), 1968, [3] Altman, E.I., Predctng Performance n the Savngs and Loan Assocaton Industry. Journal of Monetary Economcs, October, (1977), [4] Altman, E.I., Corporate Fnancal Dstress and Bankruptcy. 3rd ed., New York: John Wley & Sons, Inc, [5] Altman, E.I, Predctng Fnancal Dstress of Companes: Revstng the Z-Score and Zeta Models. Workng Paper, (000).

16 14 Fu Shuen She [6] Beaver, W.H., Fnancal Rato as Predctors of Falure, Emprcal Research n Accountng: Selected Study, Journal of Accountng Research, 4, (1996), [7] Boyd, J.H., Runkle, D.E., Sze and performance of bankng frms. Journal of Monetary Economcs, 31, (1993), [8] De Ncoló, G., Bartholomew, P., Zaman, J., Zephrn, M., Bank consoldaton, nternalzaton, and conglomerzaton. Workng Paper No. 03/158, IMF, (004). [9] Duan, J.C. and Yu, M.T., Forbearance and Prcng Depost Insurance n a Multperod Framework. Journal of Rsk and Insurance, 61(4), (1994), [10] Duan, J.C. and Yu, M.T., Captal Standard, Forbearance and Depost Insurance Prcng under GARCH. Journal of Bankng and Fnance, 3, (1999), [11] Edmster, R.O., and Schlarbaum G.G., Credt Polcy n Lendng Insttutons. Journal of Fnancal and Quanttatve Analyss, 9, (1974), [1] Gropp, R., Vesala, J., and Vulpes, G., Equty and Bond market sgnals as leadng ndcators of bank fraglty. European Central Bank Workng Paper, (00). [13] Hwang, D.Y., She, F.S., Wang, K., Ln, J.C., The Prcng of Depost Insurance Consderng Bankruptcy Costs and Closure Polces. Journal of Bankng and Fnance, 33, (009), [14] Kerfrden, C. and Rochet, J. C., Actuaral Prcng of Depost Insurance. Geneva Papers on Rsk and Insurance Theory, 18, (1993), [15] Laeven, L., Internatonal evdence on the value of depost nsurance. Quarterly Revew of Economcs and Fnance, 4, (00), [16] Lu, Y., Papakrykos, E., and Yuan, M., Market valuaton and rsk assessment of Canadan banks. Revew of Appled Economcs,, (006), [17] Martn, D., Early Warnng of Bank Falure: A Logt Regresson Approach. Journal of Bankng and Fnance, 1, (1977), [18] Merton, R.C., An Analytc Dervaton of the Cost of Depost Insurance and Loan Guarantees. Journal of Bankng and Fnance, 1, (1977), [19] Pettway, R.H., and Snkey, Jr., J.F., Establshng On-Ste Bank Examnaton Prortes: An Early-Warnng System Usng Accountng and Market Informaton, Journal of Fnance, 35(1), (1980), [0] Ronn, E. and Verma, A., Prcng Rsk-adjusted Depost nsurance: An Opton-based Model. Journal of Fnance, 41, (1986), [1] Santomero, A.M., and Vnso, J.D., Estmatng the Probablty of Falure for Commercal Banks and Bankng System. Journal of Bankng and Fnance, 1, (1977), [] Snkey, Jr., J.F., A Multvarate Statstcal Analyss of the Characterstcs of Problem Banks. Journal of Fnance, 30(1), (1975), [3] Snkey, Jr., J.F., Identfyng Large Problem/Faled Banks: The Case of Frankln Natonal Bank of New York. Journal of Fnancal and Quanttatve Analyss, 1, (1977), [4] Uhde, A., Hemeshoff, U., Consoldaton n bankng and fnancal stablty n Europe: Emprcal evdence. Journal of Bankng and Fnance, 33, (009), [5] VanHoose, D., Theores of bank behavor under captal regulaton. Journal of Bankng and Fnance, 31, (007),