TY  - JOUR
AB  - Purpose The purpose of this paper is to develop a capped barrier option framework to consider the politically preferential treatment for bank loans incentivized by government capital injections and calculate loan-risk sensitive insurance premiums.Design/methodology/approach This paper takes a capped barrier option approach to the market valuation of the equity of the bank and the liability of the deposit insurer. The cap demonstrates the dynamics of a politically connected borrowing firm’s asset and highlights the truncated nature of loan payoffs. The barrier addresses that default can occur at any time before the maturity date. The bank participating in a government capital injection program is required to fund the politically connected firm that has preferential access to financing.Findings Political connection as such makes the bank more prone to risk taking at a reduced interest margin, produces greater safety for the bank owing to government capital injections, and leads to increasing the fair deposit insurance premium. The positive effect of political connection on the deposit insurance premium, which ignores the cap and the barrier yields significant over-estimation.Originality/value The study on the politically connected borrowing firm shows that political connection is likely to affect the distressed bank’s performance, yielding the political-connection cost of a reduced bank interest margin and the political-connection benefit of a reduced bank equity risk, contributing the literature on political connection and bank bailout.
VL  - 15
IS  - 1
SN  - 1743-9132
DO  - 10.1108/IJMF-12-2017-0271
UR  - https://doi.org/10.1108/IJMF-12-2017-0271
AU  - Lin Jyh-Horng
AU  - Chen Shi
AU  - Huang Fu-Wei
PY  - 2018
Y1  - 2018/01/01
TI  - Political connections, government capital injection, and deposit insurance premium
T2  - International Journal of Managerial Finance
PB  - Emerald Publishing Limited
SP  - 2
EP  - 18
Y2  - 2024/05/07
ER  -