On asset-liability matching and federal deposit and pension insurance
AbstractAsset-liability mismatch was a principal cause of the Savings and Loan Crisis of the 1980s. The federal government's failure to recognize the mismatch risk early on and manage it properly led to huge losses by the Federal Savings and Loan Insurance Corporation, which had to be covered by taxpayers. In dealing with the problems now facing the defined-benefit pension system and the Pension Benefit Guaranty Corporation (PBGC), the government seems to be making some of the same mistakes it made then. Among the causes is the fallacious belief that because pension funds have a long time horizon the risk of investing in equities is negligible. In fact, the opposite is true. Moreover, for the PBGC, the mismatch risk is magnified by moral hazard and adverse selection. Distressed companies facing the prospect of bankruptcy have an incentive to underfund their pension plans and adopt risky investment strategies; healthy companies have an incentive to terminate their plans and exit the system. The paper explores some ways to limit the costs of a potential PBGC bailout.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of St. Louis in its journal Review.
Volume (Year): (2006)
Issue (Month): Jul ()
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Jeffrey R. Brown, 2008.
"Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation,"
Journal of Economic Perspectives,
American Economic Association, vol. 22(1), pages 177-198, Winter.
- Jeffrey R. Brown, 2007. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," NBER Working Papers 13438, National Bureau of Economic Research, Inc.
- Deborah J. Lucas, 2006. "Commentary on "On asset-liability matching and federal deposit and pension insurance"," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 331-336.
- Dale F. Gray & Robert C. Merton & Zvi Bodie, 2006. "A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy," NBER Working Papers 12637, National Bureau of Economic Research, Inc.
- Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009.
"New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability,"
Working Papers Central Bank of Chile
541, Central Bank of Chile.
- Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Papers 13607, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Xiao Xiaohong) The email address of this maintainer does not seem to be valid anymore. Please ask Xiao Xiaohong to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.