FORBEARANCE AND PRICING DEPOSIT INSURANCE IN A MULTIPERIOD FRAMEWORK

A multiperiod deposit insurance pricing model is developed in this article, which utilizes an asset value reset rule comparable to the typical practice of insolvency resolution by insuring agencies. The fairly-priced premium rate of our model can substantially differ from Merton's (1977). After incorporating capital forbearance and moral hazard into the model, our results show that the fairly-priced premium rate is not neutral to forbearance policy even in the absence of moral hazard. Our model formalizes the process of how excessive risk-taking under capital forbearance could lead to instability in the deposit insurance system.