EVALUATING DEPOSIT INSURANCE FOR JAPANESE BANKS

Recent declines in Japanese land and stock market prices have thrown in doubt the financial well-being of the Japanese banking system and the adequacy of its deposit insurance system. In this study, we apply the pricing models of Fries and Perraudin (1993a) and Merton (1977) to value the Japanese authorities’ deposit guarantees for 16 city, trust, and long-term credit banks. Both models are estimated using exact maximum-likelihood techniques that fully allow for time aggregation and the fact that observed quantities such as stock market values are nonlinear functions of underlying driving processes. J. Japan. Int. Econ., December 1993, 7(4), pp. 356-386. International Monetary Fund; Department of Applied Economics, University of Cambridge, Cambridge CB3 9DE; and CEPR. © 1993 Academic Press, Inc.