Private Insurance Against Systemic Crises?
AbstractInsurance contracts contingent on macroeconomic shocks or on average bank capital could be a way of insuring against systemic crises. With insurance, banks are recapitalized when negative events would otherwise cause a write down of capital or even bank insolvency. In a simple model we illustrate the working of these contracts and how insurance could be achieved. We identify the main pitfalls of this approach: the insurance capacity of an economy may be too limited, insurance must be mandatory, insurance does not curb excessive risk taking (unobservable or observable), the insurers may go bankrupt in crises, and managerial restrictions on a rising bank equity capital limit insurance. Finally we discuss some complementary regulatory measures to foster the effectiveness of crisis insurance. In particular, we suggest mandatory purchase of insurance contracts against systemic crises by managers of large banks.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7342.
Date of creation: Jun 2009
Date of revision:
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Find related papers by JEL classification:
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-07-11 (All new papers)
- NEP-BAN-2009-07-11 (Banking)
- NEP-BEC-2009-07-11 (Business Economics)
- NEP-IAS-2009-07-11 (Insurance Economics)
- NEP-REG-2009-07-11 (Regulation)
- NEP-RMG-2009-07-11 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gersbach, Hans, 2004. "Financial Intermediation with Contingent Contracts and Macroeconomic Risks," CEPR Discussion Papers 4735, C.E.P.R. Discussion Papers.
- Hans Gersbach & Volker Hahn, 2009.
CER-ETH Economics working paper series
09/107, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
- Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo, vol. 59(4), pages 609-627, December.
- Jimenez Porras, G. & Ongena, S. & Peydro, J.L. & Saurina, J., 2012. "Credit Supply versus Demand: Bank and Firm Balance-Sheet Channels in Good and Crisis Times," Discussion Paper 2012-005, Tilburg University, Center for Economic Research.
- Jin Cao & Gerhard Illing, 2010.
"Regulation of systemic liquidity risk,"
Financial Markets and Portfolio Management,
Springer, vol. 24(1), pages 31-48, March.
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