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Private Insurance Against Systemic Crises?

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  • Gersbach, Hans

Abstract

Insurance 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 Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7342.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7342

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Related research

Keywords: automatic recapitalization; banking crises; banking regulation; financial intermediation; insurance contracts;

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Cited by:
  1. 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.
  2. Hans Gersbach & Volker Hahn, 2009. "Banking-on-the-Average Rules," CER-ETH Economics working paper series 09/107, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  3. Cao, Jin & Illing, Gerhard, 2010. "Regulation of Systemic Liquidity Risk," Discussion Papers in Economics 11306, University of Munich, Department of Economics.

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