The Bank Capital: An Insurance Perspective
The Bank Capital: An Insurance Perspective

Author(s): Ekaterina Panttser, Weidong TIAN
Subject(s): Economy, Business Economy / Management, Accounting - Business Administration
Published by: ASERS Publishing
Keywords: capital insurance; insurance capital; too big to fail
Summary/Abstract: This chapter presents an insurance framework of the bank capital by introducing a new type of capital, namely, an insurance capital. A bank pays the insurance capital to an entity which injects a pre-determined payout of capital during the period of systemic crisis. The pre￾determined payout relies on the aggregative loss of a banking sector, so this contract between the bank and the entity is a capital insurance contract. In a rational expectations equilibrium setting, the entity charges an appropriate premium while the banks purchase an optimal amount of the insurance. We demonstrate that, both the entity and the banks have motivations to participate in this capital insurance program due to their increased expected utilities (welfare) respectively. The total systemic risk ex post within the capital insurance program is reduced and can be even removed eventually after repeatedly entering the capital insurance program. Therefore, this insurance capital idea should be endorsed to hedge the systemic risk and to deal with the “too big to fail" issues.

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