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.
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