ROBERTO, AKYUWE (2009) ESTIMATING INDONESIA DEPOSIT INSURANCE’S EXPECTED LOSS USING ADJUSTED-CREDIT PORTFOLIO APPROACH. BULETIN EKONOMI JURNAL MANAJEMEN, AKUNTANSI DAN EKONOMI PEMBANGUNAN, 7 (2). pp. 141-148. ISSN 1410-2293
Abstract
Deposit insurance is one of the key elements of the financial safety net arrangement established to maintain public confidence in the national banking system. Referring to the banking system model of Diamond & Dybvig (1983), deposit insurance can avoid socially undesirable bank runs by providing guarantee to the depositor’s funds in the banking system. To do so, a deposit insurer has to assure the public that it has an adequate amount of funds to absorb its potential losses caused by bank defaults. Thus, the size of the deposit insurance fund (DIF) becomes one of the main concerns of bank regulators and government. In recent years, discussions about the proper methodology to determine the adequate amount of the DIF have been increasing. Most of the academic literatures related to the topic, such as Bennett (2001), Kuritzkes et al (2005), and Smirnov et al (2005), recommend the implementation of a risk management-based model for the assessment of the DIF. They argue that the loss distribution of deposit insurance is analogous to the credit loss distribution faced by a bank. Accordingly, a credit risk model that is commonly used by a bank to determine its loss reserve and economic capital level2 could also be implemented in case of deposit insurance to determine its loss reserve and to evaluate DIF sufficiency. In IADI’s survey research (2009a), this method, namely a credit portfolio approach, is found being implemented by several deposit insurers to determine or evaluate their reserve ratio, such as in Hong Kong, Singapore, United States, and Canada. In addition, this approach could also be used as a base for risk-based deposits assessment or pricing such as proposed by Ronn & Verma (1986), Dermine & Lajeri (2000), Laeven (2002), Maccario et al (2003), Sironi & Zazzara (2004), and Dev et al (2006). In this paper, a credit portfolio model is applied to estimate the expected loss of Indonesia Deposit Insurance Corporation (IDIC) by using IDIC’s internal rating of 121 commercial banks during January 2009-June 2011. Different from the former studies, the Cohort method is used to estimate the probability of default for each bank rating due to limited default data3. A fixed proportion of loss-given default (LGD) is assumed to all banks in the sample due to limited data of bank liquidation proceeds. Then, each bank’s total deposits is used as the exposure-at-default (EAD), projected one year ahead using a classical decomposition technique considering trend, cyclical, seasonal, and random components. Finally, “the IDIC’s annual expected loss” at the end of year 2011 is estimated under normal and stress scenario
Actions (login required)
![[img]](http://repository.upnyk.ac.id/style/images/fileicons/application_pdf.png)
