Purpose: The purpose of this paper is to develop a capped barrier option framework to consider the politically preferential treatment for bank loans incentivized by government capital injections and calculate loan-risk sensitive insurance premiums. Design/methodology/approach: This paper takes...

Purpose: The purpose of this paper is to develop a theoretical framework to answer the following question: What are the consequences of sunflower behavior as well as spread behavior for how asset-liability management is administrated in a life insurance company? Design/methodology/approach:...

In this paper, we develop a contingent claim model to evaluate a bank's equity and liabilities that integrates the premature default risk conditions with loan rate-setting behavioral mode and multiple shadow banking activities under capital regulation. The barrier options theory of corporate...

Purpose: This paper aims to theoretically examine the effects of regulatory policyholder protection on spread behavior and default probability of a life insurance company. Design/methodology/approach: The authors construct a contingent claim model for the valuation of the equity of a life...

The main purpose of this paper is to model bank spread behavior under capital regulation and deposit insurance. Comparative static results show that an increase in the capital-to-deposits ratio or the deposit insurance decreases the bank's interest margin or spread. It is also shown that an...

The banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This article examines the impact of retail banking on performance by liquidity providing and branch network strategies. Our findings suggest...

Since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. We explore this function under a cap-based valuation. We find that (i) the strike price of the cap-based valuation increases the...

We study the effects of purchasing distressed loan on bank equity risk under the Legacy Loan Program (LLP), in which the government is in partnership with private investors. The bank may refuse LLP when its knock-out value is too low. When the bank decides to participate in the LLP, the...

This paper proposes a framework for bank equity valuation based on a path-dependent, barrier option model. A direct implication of this framework is that bank equity will be priced as a down-and-out call option. Using this approach, we examine how bank interest margin, i.e., the spread between...

This article proposes a framework for bank default risk measure under government capital injection explicitly coinciding with an adverse signal that a rescued bank is expected to have significant future losses. A bank facing a serious problem of early closure may have a strong incentive to...