Deposit insurance funding and insurer resource allocation: A portfolio model of insurer behavior under uncertainty

In this chapter we develop an agency model of the deposit insurer whose decisions are made under uncertainty The deposit insurer's bank supervision and monitoring activities are portrayed as resource allocations that endogenously determine two major components of the insurer's profits, deposit insurance premiums and failure-resolution costs. Using this framework we feel one can fairly represent the deposit insurer's resource allocation decisions as a portfolio choice problem. As a consequence, many of the results of portfolio theory can be applied to the deposit insurer In particular the availability of a deposit insurance find that can be invested in riskless investment alternatives, and the availability of borrowing opportunities, necessarily influences the insurer's resource allocation decisions.