Journal of Applied Finance & Banking

A Prognostic Theory for the Systemic Cost of Bank Failures

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  • Abstract

    We fragment the cost of bank failures within the national Deposit Insurance Fund into three components that include the resolution cost of the less-essential banks, the administrative rescue cost of the larger and more influential financial institutions, and the complete legislative bailout cost of the systemically vital banks. We develop a forecasting model that can help regulators to comprehend the expected systemic cost of future bank failures both over reasonably short-terms and through extended periods of time. The current theory can assist policy makers in better designing the reserves within the Deposit Insurance Fund and the exclusive premiums charged from banks that routinely subsidize these reserves.