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Preventing Banking Crises--with Private Insurance?


  • Hans Gersbach


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:, Oxford University Press.

Suggested Citation

  • Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo, vol. 59(4), pages 609-627, December.
  • Handle: RePEc:oup:cesifo:v:59:y:2013:i:4:p:609-627

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    References listed on IDEAS

    1. Gersbach, Hans, 2004. "Financial Intermediation with Contingent Contracts and Macroeconomic Risks," CEPR Discussion Papers 4735, C.E.P.R. Discussion Papers.
    2. 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.
    3. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    4. Hakenes, Hendrik & Schnabel, Isabel, 2010. "Banks without parachutes: Competitive effects of government bail-out policies," Journal of Financial Stability, Elsevier, vol. 6(3), pages 156-168, September.
    5. Chichilnisky, Graciela & Wu, Ho-Mou, 2006. "General equilibrium with endogenous uncertainty and default," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 499-524, August.
    6. Hans Gersbach & Volker Hahn, 2011. "Modeling Two Macro Policy Instruments - Interest Rates and Aggregate Capital Requirements," CESifo Working Paper Series 3598, CESifo Group Munich.
    7. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
    8. Alon Raviv, 2004. "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes," Finance 0408003, EconWPA.
    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. Gersbach, Hans, 2009. "Private Insurance Against Systemic Crises?," CEPR Discussion Papers 7342, C.E.P.R. Discussion Papers.
    12. Gersbach, Hans, 2003. "The Optimal Capital Structure of an Economy," CEPR Discussion Papers 4016, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Aptus, Elias & Britz, Volker & Gersbach, Hans, 2014. "On the economics of crisis contracts," CFS Working Paper Series 453, Center for Financial Studies (CFS).

    More about this item

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services


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