Extract from. Études et Dossiers No th Meeting of The Geneva Association s Amsterdam Circle of Chief Economists

Transcription

1 International Association for the Study of Insurance Economics Études et Dossiers Extract from Études et Dossiers No th Meeting of The Geneva Association s Amsterdam Circle of Chief Economists Insurance Prospects 212 and Beyond 28 February-1 March 213 Amsterdam This document is free to download from The Geneva Association website, March 213 Working Paper Series of The Geneva Association Association Internationale pour l'etude de l'economie de l'assurance Geneva Route de Malagnou 53, CH-128 Geneva Tel: Fax: Basel Sternengasse 17, CH-451 Basel Tel: Fax:

2 Please note that The Geneva Association will stop the production of Etudes & Dossiers on 1 May 213. Instead, conference programmes, presentations and related documents will be available on our website () in the Conferences & Events section and under the relevant research programme. The Geneva Association Working Paper Series Études et Dossiers appear at irregular intervals about 1 12 times per year. Distribution is limited. The Études et Dossiers are the working paper series of The Geneva Association. These documents present intermediary or final results of conference proceedings, special reports and research done by The Geneva Association. Where they contain work in progress or summaries of conference presentations, the material must not be cited without the express consent of the author in question. The opinions expressed in Geneva Association newsletters and publications are the responsibility of the authors. We therefore disclaim all liability and responsibility arising from such materials by any third parties. This document is free to download from The Geneva Association website, please visit:. Layout & Distribution: Alessandra Platania The Geneva Association Association Internationale pour l'etude de l'economie de l'assurance

3 Insurers, Banks, and the Euro Crisis Arne Holzhausen I know what you did last summer Yield spread over 1y German government bonds, percentage points The euro crisis reached a critical dimension Capital flight from peripheral countries Convertibility premia Negative feedback loops between banks and sovereigns Fragmentation / renationalization of financial markets Source: EcoWin

4 Agenda 1 Investment characteristics of insurers and banks 2 Investment patterns since Lehman 3 Outlook 3 Banks and Insurers, important creditors for the euro economy EUR billions Euro area banks (212, Q4) Total assets 32,684 Loans to euro area residents 17,988 Banks 5,791 Government 1,153 Other 11,43 Holdings of securities other than shares issued by euro area residents 4,96 Banks 1,86 Government 1,629 Other 1,417 Euro area insurers and pension funds (212, ) Total assets 7,653 Loans to euro area residents 446 Banks 8 Government 14 Other 298 Holdings of securities other than shares issued by euro area residents 2,481 Banks 686 Government 1,33 Other

5 Agenda 1 Investment characteristics of insurers and banks 2 Investment patterns since Lehman 3 Outlook 5 European banks Deleveraging à la Européenne Growth of selected assets & liability classes of euro area banks from October 28 to December 212 (%) Lending to the real economy Deposits from the real economy Capital & Reserves Total assets External liabilities External assets Deposits from banks Lending to banks 7 14,4 35 Reducing leverage LCBGs* reduced their leverage ratio considerably, from 31 in 28 to 23.5 in 212 (). However, this reduction is driven by a significant increase in banks equity; assets remained largely unchanged. But balance sheets were restructured: Reduction of international (US!) and interbank business (euro area!). At the same time, lending to the real economy continued to grow, mainly driven by rising claims on governments (+28% since Lehman). % *Large and complex banking groups 6 2-3

6 European insurers and pension funds Deleveraging, what deleveraging? Growth of selected assets & liability classes of euro area banks from 28, to 212, (%) Growing unabated Government bonds* Bank bonds* Other bonds* Loans Technical reserves -4 Total assets Capital (quoted and unquoted shares) Ever since Lehman, there have been only three quarters when balance sheets of insurers and pension funds contracted (very) slightly. Accordingly, insurers and pension funds continued to be an important source of financing for the rest of the economy, in particular for crisis-ridden banks and sovereigns. Surprisingly, capital did not increase mainly because quoted shares are valued at market prices. % *issued by euro area residents 7 Loans to euro area residents Home bias I Euro area banks, change from 28 to 212 Q4 (%) Euro are insurers and pensions funds, change from 28 to 212 Q4 (%) 2 1 Total loans to euro area residents: -.8% Share of cross-border business: 11% (-4.5pp) Total loans to euro area residents: +18,6% Share of cross-border business: 11% (-,6pp) loans to banks loans to others Cross-border loans to banks Cross-border loans to others -9 loans to banks loans to governmets loans to others Cross-border Cross-border Cross-border loans to loans to loans to banks governments others 8 2-4

7 Bonds issued by euro area residents Home bias II Euro area banks, change from 28 to 212 Q4 (%) Euro area insurers and pensions funds, change from 28 to 212 Q4 (%) 9 8 Total bonds by euro area residents: +13.7% Share of cross-border business: 26.4% (-17.7pp) 1 9 Total bonds by euro area residents: +33% Share of cross-border business: 45.4% (-8.8pp) Cross-border Cross-border bonds by banks bonds by others bonds by banks bonds by others -1 bonds by banks bonds by governmets bonds by others Cross-border Cross-border Cross-border bonds by bonds by bonds by banks governments others 9 Case study Bye, bye, Greece Foreign claims on Greece by international banks in USD m USD 238bn Greece GDP 29: USD 32bn Source: BIS

8 Agenda 1 Investment characteristics of insurers and banks 2 Investment patterns since Lehman 3 Outlook 11 Re-nationalization of the euro financial market stopped? Change in outstanding net cross-border financing by banks in the euro area in EUR bn (q-o-q) Increase in outstanding net cross-border financing from 1999 to EUR 179bn Q2- - Q4- - Q2- - Q4- - Q2- - Q4- - Q2- - Q4- - Q Q4-212 Decrease in outstanding net cross-border financing since 29 : - EUR 733bn

9 Scenarios for the future Status quo Stricter fiscal and economic policy controls with limited pooling of liabilities through ESM and a rudimentary banking union (ECB as single supervisor) Monetary policy ultra-loose and unconventional (OMT) Ongoing deleveraging and fiscal consolidation in periphery with deflationary impact Overall: Unstable equilibrium between inflationary and deflationary forces Economic & fiscal union Significant transfer of sovereignty rights to the EU Fiscal union with powers of intervention, EMU finance minister Extensive pooling of debt: introduction of Eurobonds Complete banking union (with resolution authority & funds) Eurozone break-up Default and exit of several countries (rump core monetary union with small number of countries could remain) Likely consequence: Global and financial market crisis at least on the scale of Lehman crisis Steep appreciation of core euro Extremely low yields for a number of years Deflationary trends gain the upper hand in Europe for several years 13 Euro 222: Final destination? Common policies Investing in Europe s physical and intellectual infrastructure to boost growth and competitiveness Fiscal guidance controls with teeth Economic guidance Limiting imbalances Financial integration EU-level supervision Sovereign debt restructuring mechanism Strengthening democratic accountability of EU institutions Transfer of sovereign rights by consent of the people

10 Agenda Appendix 15 Who fills the financing gap? Public creditors + central banks 1. Bilateral loans 2. EFSF / ESM Net claims of the Bundesbank within the Eurosystem (TARGET), EUR bn 8 3. IMF ECB (TARGET-balances) Jan Source: Deutsche Bundesbank