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

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.