Minimizing Risk

Nouriel Roubini and Matthew Richardson want to motivate banks to have a lower risk profile. They think that the way to do it is to tax the banks. Yes, the current proposed legislation does have a form of tax, but it's designed more to have the banks pay for a future bailout rather than as a risk preventer, which is the aim of Roubini and Richardson (R&R).

R&R want a tax based on two elements: an insurance premium that the bank pays on debts that are guaranteed by us, whether explicitly or implicitly and a fee that would compensate those who are hurt by the next systemic financial crisis. They reckon that a major financial crisis occurs every fifty years or so and costs about a 5% loss in GDP. This assumption translates into a $14 billion annual tax on the banks.

R&R and friends have also published a paper entitled "Measuring Systemic Risk" which analyzed the risk to the large banks as of June 2007. Mirabile dictu, they concluded that the firms at greatest risk were the ones who failed in real life.