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Preventing Banking Crises--with Private Insurance?

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  • Hans Gersbach

Abstract

In this article, we review the functioning of private insurance against banking crises and identify its potential. The essential idea is that banks are recapitalized by private investors when negative events would otherwise cause a write-down of capital--or even bank insolvency. There are two modes of private insurance: pure insurance contracts and contingent debt contracts. In the former, funding of banks and insurance are separated, whereas in the latter, debt holders provide insurance. We summarize the main insights regarding the potential and limits of private insurance. We also discuss how such crisis insurance could be strengthened through complementary regulatory measures. Finally, we outline the overall pecking order of buffers and insurance for banking systems. (JEL codes: D41, E4, G2) Copyright The Author 2013. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 59 (2013)
Issue (Month): 4 (December)
Pages: 609-627

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Handle: RePEc:oup:cesifo:v:59:y:2013:i:4:p:609-627

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  1. Gersbach, Hans, 2009. "Private Insurance Against Systemic Crises?," CEPR Discussion Papers 7342, C.E.P.R. Discussion Papers.
  2. Hendrik Hakenes & Isabel Schnabel, 2004. "Banks without Parachutes – Competitive Effects of Government Bail-out Policies," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2004_12, Max Planck Institute for Research on Collective Goods.
  3. Alon Raviv, 2004. "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes," Finance 0408003, EconWPA.
  4. Hans Gersbach, 2008. "Banking with Contingent Contracts, Macroeconomic Risks, and Banking Crises," CER-ETH Economics working paper series 08/93, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  5. Graciela Chichilnisky & Ho-Mou Wu, 2006. "General equilibrium with endogenous uncertainty and default," Discussion Papers 0506-29, Columbia University, Department of Economics.
  6. Gersbach, Hans, 2003. "The Optimal Capital Structure of an Economy," CEPR Discussion Papers 4016, C.E.P.R. Discussion Papers.
  7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  8. Gersbach, Hans, 2004. "Financial Intermediation with Contingent Contracts and Macroeconomic Risks," CEPR Discussion Papers 4735, C.E.P.R. Discussion Papers.
  9. Sinn, Hans-Werner, 1982. "Kinked utility and the demand for human wealth and liability insurance," European Economic Review, Elsevier, vol. 17(2), pages 149-162.
  10. Jeitschko, Thomas D. & Jeung, Shin Dong, 2005. "Incentives for risk-taking in banking - A unified approach," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 759-777, March.
  11. Hans Gersbach & Volker Hahn, 2011. "Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements," CESifo Working Paper Series 3598, CESifo Group Munich.
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