Essays on regulatory control of deposit insurance and dual trading
Wu, Lifan
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https://hdl.handle.net/2142/19334
Description
Title
Essays on regulatory control of deposit insurance and dual trading
Author(s)
Wu, Lifan
Issue Date
1994
Doctoral Committee Chair(s)
Bryan, William R.
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Business Administration, Banking
Language
eng
Abstract
Essay 1 extends the existing theoretical framework to incorporate a bank's charter value and analyze directly its effect on the pricing of deposit insurance. It derives values of deposit insurance with both deterministic and stochastic charter values. It is shown that significant charter value can be a main cost to exploit the FDIC's guarantee at a given level of regulatory control. Consequently, studies that fail to allow for charter value tend to understate the costs of a bank's risk-shifting, and tend to overstate the true obligation of the FDIC for an insolvent bank. In the case of stochastic charter value, the correlation between a bank's tangible assets and its charter value is an important factor in determining its fair insurance premium.
"Essay 2 investigates the impacts of two pieces of regulation restricting dual trading: the ""top-step rule"" in 1987 and the banning of dual trading in mature months of big contracts in 1991 at Chicago Mercantile Exchange. The ""top-step rule"" reduces the large amount of trades and volume of dual trading, but the drop is offset by the increase in personal trading, leaving total market liquidity unchanged. The 1991 ban results in a substantial decline in both dual trading and nondual trading. It is found that the dual traders who switched to brokerage services following the rule changes do not have better brokering skills (as measured by their success in reducing the price impact of customer trades) relative to the remaining dual traders. The dual traders who switched to trading exclusively for themselves following the rule changes appear to have better trading skill compared to the remaining dual traders."
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