A model of coexistence of deposit taking and lending to determine the market value of bank equity and interest margin is developed. Moreover, we examine the relationships among capital regulation, deposit insurance, and the optimal bank interest margin under the valuation of swaptions. An increase in the capital-to-deposits ratio and the deposit insurance increases the bank's interest margin when the bank's swaption execution is during a longer period horizon between the forward start date and the forward maturity date and its forward swaption is struck at a negative annuity of loan rate- setting. Our findings provide alternative explanations for the swaption valuation concerning bank liquidity and risk management.
