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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Liability Insurance and Guarantees

Liability Insurance and Guarantees

(p.145) 12 Liability Insurance and Guarantees
Connectedness and Contagion

Hal S. Scott

The MIT Press

The Dodd–Frank Act not only cut back on the Fed's ability to serve as lender of last resort, it also cut back on the Federal Deposit Insurance Corporation's (FDIC) ability to expand deposit insurance or create other guarantees during a crisis. A starting point for reform would be to eliminate the changes made to the guarantee system by Dodd–Frank. But more needs to be done to further strengthen the system. This chapter explores the various problems in designing a better and broader insurance regime. It discusses the amount of liabilities to insure; insurance pricing; ex ante pricing; option pricing; ex post pricing; and implementing a guarantee program for short-term nondeposit creditors of financial institutions only when it becomes apparent that there is a crisis involving heightened systemic risk.

Keywords:   Federal Reserve, financial policy, financial regulation, liability insurance, Dodd–Frank, deposit insurance, insurance pricing, ex ante pricing, option pricing, monetary policy

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