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Private Insurance Against Systemic Crises?

Author

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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.

Suggested Citation

  • Gersbach, Hans, 2009. "Private Insurance Against Systemic Crises?," CEPR Discussion Papers 7342, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7342
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    References listed on IDEAS

    as
    1. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, vol. 5(3), pages 224-255, September.
    2. Gersbach, Hans, 2004. "Financial Intermediation with Contingent Contracts and Macroeconomic Risks," CEPR Discussion Papers 4735, C.E.P.R. Discussion Papers.
    3. Robert J. Shiller, 2003. "Social Security and Individual Accounts as Elements of Overall Risk-Sharing," American Economic Review, American Economic Association, vol. 93(2), pages 343-347, May.
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    Cited by:

    1. Gersbach, Hans & Haller, Hans & Müller, Jürg, 2015. "The macroeconomics of Modigliani–Miller," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1081-1113.
    2. Javier Suarez, 2010. "The Pending Challenges in Global Financial Regulation Reform," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 4(2), pages 241-253, May.
    3. Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo Group, vol. 59(4), pages 609-627, December.
    4. Ricardo J Caballero, 2010. "Sudden Financial Arrest," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 6-36, August.
    5. Jin Cao & Gerhard Illing, 2010. "Regulation of systemic liquidity risk," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(1), pages 31-48, March.
    6. 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.

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    More about this item

    Keywords

    Automatic recapitalization; Banking crises; Banking regulation; Financial intermediation; Insurance contracts;
    All these keywords.

    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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