Insurers versus Banks in Systemic Regulation LSE Systemic Risk Centre Conference ’Perspectives on Systemic Risk’ London, 16 October 2014 Christian Thimann
Insurance sector in the EU Banks Assets Loans Loans to firms and households
Liabilities Equity Deposits Households and firms deposits
Insurance companies Assets Liabilities Equity
Cash Loans Debt securities Government debt
Interbank loans Bank debt Loans to govts.
Debt securities Government debt Bank debt Other
Interbank deposits
Debt issued
Equity securities
Total: € 30.4 trillion
Insurance technical reserves
Other
Investment fund shares Equity securities
Debt issued
Total: € 6.2 trillion
• 5 100 insurance companies in Europe • 995 000 direct employees and 1 million outsourced employees in Europe Source: Insurance Europe
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Regulation going global & the notion of systemic risk
Systemic risk: • “Failure of a significant part of financial institutions” (Acharya et al. 2011; De Bandt and Hartmann, 2000) • “Correlated defaults of financial institutions over time” (Billio et al. 2010) • “Impairment of the financial system (Adrian and Brunnermeier, 2011) • “Malfunctioning of the entire financial system” (Bach and Nyuyen, 2012; RodriguezMoreno and Pena, 2013) • “Loss of economic value or widespread loss of confidence in the financial system” (Baur et al. 2003; Cummins and Weiss, 2011).
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Systemic risk: timeline FSB policy measures for systemic banks
2008 G-20 FSB to address systemic risks in financial sector
4
2011
FSB IAIS to develop rules for insurance sector
2012
2013
Initial list of 9 systemic insurers (G-SIIs)
2014-2015 Policy measures for insurers developed by end2015
Parallels between banking and insurance frameworks First designation date Number of institutions
Overall justification
FSB framework for banks
FSB framework for insurers
2011 29
2013 9
Size, global activity, interconnectedness, complexity and substitutability
Size, global activity, interconnectedness, non traditional noninsurance activities and substitutability
1) Enhanced supervision 2) Effective risk management planning
Implications
3) More capital
Timeline
5
2010-2016
2013-2016
Differences between banks and insurers – an illustration Assets Interbank loans
Banking 1 Interbank market
Liabilities
Assets
1
Interbank deposits
Client Deposits 2 Maturity transformation and leverage
No “interinsurance market”
Assets
Capital Loans to firms and households and other assets
Insurance
Short term and volatile
3
Constitute money
4
(Public and private debt securities, equities, real estate, infrastructure financing, cash…)
Debt
Liabilities Passive Capital Commitments to policy Holders
2 No maturity transformation and leverage
Finances banking activities
Largely stable, predictable Do not constitute money
Debt Not financing insurance activities
Highly systemic
Differences
Systemic
1
Institutional interconnectedness
3
Liquidity risk
Not systemic
2
Maturity transformation and leverage
4
Money and payments function
3 4
Banks and insurers: two differences, four similarities 4 differences between banks and insurers as regards to systemic risk
Only two similarities
1. Institutional interconnectedness
1. Financial intermediaries
Banks are institutionally connected through the interbank market
Insurers are stand-alone operators
2. Maturity transformation and leverage Maturity transformation and leverage are inherent in banking
Insurers match asset-liability duration; leverage is quasi-absent
3. Exposure to liquidity risk Banks face an inherent liquidity risk
Insurers are liquidity-rich
4. Role on money and payment system Banks create money and they constitute the payment system
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Insurers do not create money; they use the payment system
Banks and insurers are financial intermediaries between savers and investors
2. Financial investors Banks and insurers are large-scale investors in financial markets
Leverage, Capital and loss absorption in banking and insurance “Banking all about leverage”, Leverage ratio = Equity/Assets.
Leverage
Insurance leverage is quasi-absent. Leverage=Equity/Debt? In banking, capital helps funding. Can help address first deposit outflows. Capital shortfall equals systemic risk. Capital surcharges control leverage.
Capital
Built-in absorption capacity
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In insurance, capital ensures that last policy is paid. Capital shortfall does not equal systemic risk. Capital surcharges do not control leverage. In banking, challenging.
higher
loss
absorption
beyond
equity very
In insurance, higher loss absorption through participating contracts.
Conclusions on systemic risk regulation
1. FSB/research parallelism between banking and insurance misleading; differences in systemic interaction are far-reaching. 2. Insurers’ role for the economy is undisputed; sources of risk, contagion and channels of transmission are yet to be analyzed more specifically. 3. Different roles of leverage, capital and risk absorption crucial. 4. Given different balance sheet structure, capital surcharges might not be an appropriate control instrument, other tools are likely to be more effective.
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