This proposal asks institutions to bear the cost of materialized systemic risk in the form of premiums. In that sense, it internalizes external diseconomies. That being said, the proposal tabled by Professor Kashyap and others also has many problems. First, the capital insurance that they advocate is entirely private and the main insurers will be private-sector investors.
Will private-sector investors on their own be able to come up with the enormous liability reserves that would be required to halt systemic risk? They look to pension funds and SWFs to play this role, but will we always rely on them? Obviously, you might be able to attract enough investors if premiums are sufficiently high.