Abstract
The authors set up a deposit insurance pricing model that treats forbearance as an option to delay the resolution of undercapitalized financial institutions and, sub-sequently, derive a closed-form solution for the deposit insurance put. The put is decomposed into a capital component and a time component. They then evaluate how the critical policy parameters relate to the cost of deposit insurance, and examine how moral hazard behaviour and the accompanying risk-taking behaviour affect deposit insurance premiums. © ASAC 2005.