Using a model for pricing deposit guarantees that treats the bank's investments as a portfolio of default-free bonds and risky loans, the authors push back uncertainty to the level of the borrowing firm and thus are able to explore how factors like firm leverage, loan maturity, and correlation...

Most models of deposit insurance assume that the volatility of a bank's assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders...