Enhancing the Swedish Deposit Insurance Fee - A Study of Bank Behavior, Fairness and Risk in a Simulation Setting

Abstract: The Swedish National Debt Office (Riksgälden) is considering altering the current Swedish deposit insurance fee model with the purpose of increasing fairness and risk-differentiation among participating institutions. This paper studies the current Swedish deposit insurance fee model in a U.S. data setting, drawing from more than 20 years of historical data between 1992 and 2013. It further considers a set of interesting variables, which could be used to enhance the model, focusing mainly on adequacy and the ambition to create good incentives. It uses extensive academic research, simulations of bank behavior, default costs and tests on relations of factors to bank failure in an assessment of three model specifications. The results indicate that some positive effects with respect to fairness and risk-differentiation of deposit insurance fees could potentially be obtained by expanding the current fee model in a relatively plain fashion, possibly making it simpler in the process of renewal.