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
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- 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)
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- Jin Cao & Gerhard Illing, 2010.
"Regulation of systemic liquidity risk,"
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CEPR Discussion Papers
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