Risk Differentiated Premiums for the Swedish Deposit Insurance Scheme

Sammanfattning: The purpose of this paper was to investigate the current state of the Swedish deposit insurance scheme and in particular discuss how to price the premium paid by credit institutions. The paper explained the theoretical background and need for risk-adjustments to the deposit insurance and the legal framework in Sweden and the European Union as well as general global developments. We then moved onward to discuss different premium pricing models, their benefits and drawbacks. The second part of the paper presented a quantitative overview of the Swedish deposit insurance scheme and the implementation of a credit rating based model and an option pricing based model on the Swedish four major banks, Handelsbanken, SEB, Nordea and Swedbank for the years 2008 to 2012. Our main finding, from both pricing models, is that the current flat rate model greatly overprices the the four banks but that the results are sensitive to change in input parameters. We suggest implementing a proprietary credit rating model for risk-adjusting premiums focusing on simplicity and proper incentives while still holding fees fair relative to risk. This means that parameter absolute risk should be abandoned from the pricing model. Financial institutions that are "too big to fail" should be moved to the Stability fund and priced under the assumption of going concern, to avoid pricing deposit insurance of firms that will never be allowed to go bankrupt.