INET: Measuring Systemic Risk

“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.”

See, Institute for New Economic Thinking, Measuring Systemic Risk to Empower the Taxpayer.

Ed Kane is a professor of finance at Boston College.