To: wideawake
The solution is to put credit derivatives in a separate affiliate and, per your comment, not charge deposit insurance on those transactions. The public should not assume potential liability out of proportion to the modest deposit insurance premiums levied on conventional bank deposits. Premium levels on bank deposits have been adjusted through eighty years of experience. Derivative risk exposure, however, has not been tested in the context of a general financial collapse, since the federal government bailed out the weak hands in '08. Theoretically, they all net to zero, but one or more weak links could collapse the chain. Government cannot underwrite what is an unknown risk.
To: Kennard
The solution is to put credit derivatives in a separate affiliate and, per your comment, not charge deposit insurance on those transactions.here's the resulting conundrum: how do you manage risk for depositors, when you decide to single them out as the only stakeholders in the bank whom the bank does not protect?
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