Ed Kane - Measuring Systemic Risk To Empower the Taxpayer

About the Interview

Banks take on excessive risk since they know, in case of failure, the taxpayer will step in to rescue them. That is a form of free insurance, and Ed Kane wants to end it. To do so, he says, we need to put a number on systemic risk, the amount for which the taxpayer is on the hook. Kane uses the contingent claims model developed by Nobel Laureate Robert Merton to calculate the market value of the implicit insurance -- making the cost explicit, and so empowering the taxpayer. This is new economic thinking.

About Edward Kane

Edward J. Kane is Professor of Finance at Boston College. He is a past president and fellow of the American Finance Association and a former Guggenheim fellow. Full Profile

Comments

0

I would like to clarify Ed Kane's figures. Is he saying that the annual insurance premium for US banks should be 300 bn USD? If so is there a simple formula for estimating equivalent figures for say the UK or the Eurozone?

Also where can I find more details on this, please?

David Smith, UK

0

@Ed Kane “We need to rethink the relation between tax-payers and banks.”

Absolutely! At this moment the tax-payers are giving support to banks for which their purpose has not even been defined.

I, as a very risk-adverse citizen, and therefore very grateful for the fact that banks take upon them the risk of financing other risk-takers, like small businesses and entrepreneurs, and without which the economy would fail, and I would not have the income with which to pay taxes to begin with, gladly accept supporting the banks if indeed the banks were helping the risky.

Unfortunately we have fallen in the hands of regulators who, wanting to save us tax-payers from having to pay for bank failures, have pushed the banks to help those perceived as not-risky, those who need no extra help or if helped too much (AAA-rated or Greece) could turn into very risky.

So, much more important for me than having banks pay for the cost of systemic risk, is requiring the regulators, before they regulate, to define a purpose for the banks, so as to see if I and the rest of my fellow last-picker-uppers agree with that purpose.

PS. By the way, if you allow it, here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

0

I warned a previous employer Finance Company about using past proability of default models when assessing risks. They failed and were bailed out by the Parent Bank during the GFC. If they come to rely on Government bailouts, Managers will take bigger risks.

See Azizonomics.com for fresh ideas on economic thinking.

0

The paper is entitled "Variation in Systemic Risk at US Banks During 1974-2010" is on my webpage: www2.bc.edu/~kaneeb

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