Citation

Discussion Paper Details

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Title: Private Insurance Against Systemic Crises?

Author(s): Hans Gersbach

Publication Date: June 2009

Keyword(s): automatic recapitalization, banking crises, banking regulation, financial intermediation and insurance contracts

Programme Area(s): Financial Economics

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 Reference

Gersbach, H. 2009. 'Private Insurance Against Systemic Crises?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7342