Technology choice and bank performance with government capital injection under deposit insurance fund protection

• Published in: International review of economics & finance 2015-09, Vol.39, p.162-174
• Main Authors: Chen, Shi, Lin, Ku-Jun
• Format: Article
• Language: English
• Subjects: Bank interest margin; Banking industry; Default; Default risk; Deposit insurance; Deposit insurance fund protection; Economic crisis; Government capital injection; Human resource investment; Human resources; Information technology; Public finance; Regulation of financial institutions; Studies
• ISSN: 1059-0560; 1873-8036
• DOI: 10.1016/j.iref.2015.04.003

The barrier option theory of corporate security valuation is applied to the two-stage contingent claims of a regulated bank during a financial turmoil. This paper examines the relationships among government capital injection, regulatory deposit insurance fund protection, bank interest margin, and technology choice of investment in human resource relative to information technology. An increase in human resource results in an increased interest margin, and further a decreased default risk when the bank adopts a relatively high level of information technology. We also show a positive effect of government capital injection on human resource investment and a negative effect on bank default risk. Regulatory deposit insurance fund protection weakens the increased human resource investment, but reinforces the decreased default risk. Both the government capital injection and the regulatory deposit insurance fund protection may stabilize the distressed bank explicitly considering technology choice. •A barrier option is applied to the two-stage contingent claims of a regulated bank.•The bank interest margin is positively related to human resource relative to information technology investment.•Government capital injection to the bank is positively related to human resource investment and negatively to default risk.•Deposit insurance fund protection reinforces the decreased default risk.•Government capital injection and deposit insurance fund protection stabilize the distressed bank.