A Welfare Analysis of Capital Insurance
This paper presents a welfare analysis of several capital insurance programs in a rational expectation equilibrium setting. We first explicitly characterize the equilibrium of each capital insurance program. Then, we demonstrate that a capital insurance program based on aggregate loss is better than classical insurance, when big financial institutions have similar expected loss exposures. By contrast, classical insurance is more desirable when the bank’s individual risk is consistent with the expected loss in a precise way. Our analysis shows that a capital insurance program is a useful tool to hedge systemic risk from the regulatory perspective.
References listed on IDEAS
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- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
- Youngna Choi & Raphael Douady, 2012.
"Financial crisis dynamics: attempt to define a market instability indicator,"
Taylor & Francis Journals, vol. 12(9), pages 1351-1365, August.
- Youngna Choi & Raphaël Douady, 2012. "Financial Crisis Dynamics: Attempt to Define a Market Instability Indicator," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00666245, HAL.
- Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March. Full references (including those not matched with items on IDEAS)
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