A Tax on Systemic Risk

Professors of Finance Viral Acharya, Lasse Pedersen, Thomas Philippon and Matthew Richardson propose a systemic risk tax on financial firms that is based on a firm’s expected loss should an economic crisis happen.  Specifically, they suggest that each firm be required to purchase contingent capital insurance, bought partially from the private sector and mostly from the government or central bank, to protect itself against losses during a systemic crisis.  The cost of the insurance determines the amount of the tax and would provide an incentive for firms to limit their systemic risk.  This paper is forthcoming in an NBER publication on quantifying systemic risk.

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