Evaluating the Adequacy of the Deposit Insurance Fund:
A Credit-Risk Modeling Approach
December 2001
Working Paper 2001-02
Rosalind L. Bennett
Financial Economist
Federal Deposit Insurance Corporation
Washington, D.C. 20429
(202) 898-7160
rbennett@fdic.gov
The views stated here are those of the author and do not necessarily reflect those of the
Federal Deposit Insurance Corporation. The author would like to thank John O’Keefe,
Jim Marino, Dan Nuxoll, Fred Carns, Gerald Hanweck, and Peggy Kuhn for their useful
comments and suggestions. Christine Brickman provided research assistance.
A Credit-Risk Modeling Approach
December 2001
Working Paper 2001-02
Rosalind L. Bennett
Financial Economist
Federal Deposit Insurance Corporation
Washington, D.C. 20429
(202) 898-7160
rbennett@fdic.gov
The views stated here are those of the author and do not necessarily reflect those of the
Federal Deposit Insurance Corporation. The author would like to thank John O’Keefe,
Jim Marino, Dan Nuxoll, Fred Carns, Gerald Hanweck, and Peggy Kuhn for their useful
comments and suggestions. Christine Brickman provided research assistance.
Evaluating the Adequacy of the Deposit Insurance Fund:
A Credit-Risk Modeling Approach
Rosalind L. Bennett
Abstract
As part of an effort to measure risk effectively, the FDIC hired Oliver,
Wyman & Company to develop a credit-risk model for the deposit insurance funds.
I apply their credit-risk model to estimate the FDIC’s loss distribution; and I perform
sensitivity analysis using different assumptions about the parameters of the model. The
sensitivity analysis results in a wide range of possible credit ratings associated with the
deposit insurance funds. Under one set of assumptions, the deposit insurance funds
would not warrant a BBB rating, whereas under another set of assumptions the funds
would warrant an A rating. I conclude that the measures of risk derived from the credit-
risk model are sensitive to the parameter assumptions, and it is not clear which parameter
assumptions are most relevant.
JEL Classification: G21, G28, G11, G33
Keywords: Deposit insurance, Credit risk, Default risk
A Credit-Risk Modeling Approach
Rosalind L. Bennett
Abstract
As part of an effort to measure risk effectively, the FDIC hired Oliver,
Wyman & Company to develop a credit-risk model for the deposit insurance funds.
I apply their credit-risk model to estimate the FDIC’s loss distribution; and I perform
sensitivity analysis using different assumptions about the parameters of the model. The
sensitivity analysis results in a wide range of possible credit ratings associated with the
deposit insurance funds. Under one set of assumptions, the deposit insurance funds
would not warrant a BBB rating, whereas under another set of assumptions the funds
would warrant an A rating. I conclude that the measures of risk derived from the credit-
risk model are sensitive to the parameter assumptions, and it is not clear which parameter
assumptions are most relevant.
JEL Classification: G21, G28, G11, G33
Keywords: Deposit insurance, Credit risk, Default risk