Instead of government bailouts, why not insure the largest financial services institutions?

Good idea, but probably impractical.

That is the only conclusion that can be reached from a study conducted by the
Basel Committee on Banking Supervision, whose new paper proposes a framework
for measuring and stress testing the systemic risk posed by a group of major financial institutions.

I will spare you the details of the methodology (which you can easily look up on the Basel Committee's website: http://www.bis.org/publ/work281.htm)

The theoretical insurance premium suggested by the framework that would be charged to protect against losses that equal or exceed 15% of total liabilities of 12 major US financial firms was $110 billion in March 2008, up to a possible high of $250 billion in July 2008.

In other words, if the sort of insurance scheme proposed by the Basel Committee had been in existence, it would have cost the 12 companies $110 billion to buy such insurance in March 2008, but $250 billion in July 2008.

Even $110 billion is a heck of a lot of money to pay out for insurance!

And how would you like your insurance premium swinging by more than 100% in 3 months?

Finally, would such an insurance scheme not be pro-cyclical rather than anti-cyclical? Sphere: Related Content