On Wealth Effects of Deposit Insurance Premium Revisions on Large Publicly Traded Commercial Banks

Evidence is provided from changes in deposit insurance premiums in the early 1990s on the validity of the premium absorption hypothesis and thepremium shifting hypothesis. Analysis of abnormal market returns associated with deposit insurance events using a market model event study methodology suggests that reductions in deposit insurance premiums are associated with increases in the market value of banking organizations; conversely, increases in deposit insurance premiums are associated with decreases in market wealth. The largest banks in the sample and banks with low equity capital (and low risk-based capital ratios)appear to be most affected. These results are generally consistent with the premium absorption hypothesis but inconsistent with the premium shifting hypothesis