Valuation of Deposit Insurance in South Africa Using an Option-Based Model

Discussions on introducing a deposit insurance scheme in South Africa have been floating around since 2000, without any official proposal being published or brought to Parliament. Globally, countries have increasingly adopted deposit insurance schemes with the understanding that they provide a public benefit of increasing confidence in the financial system. It is likely that South African banks and government have resisted introduction of any scheme owing to costing issues. This paper estimates the cost of deposit insurance premiums for seven large South African banks for the first time, annually over the period 2000 to 2009 using an option-based model. The premiums exhibit high volatility over time and across banks but yield an average value that is internationally comparable. The authors also propose a risk-weighted, multi-tier premium structure to encourage appropriate pricing for different categories of risk.