A key element of the assessment is to
test contagion from a failing bank to direct counterparties and other
market participants, including cross-sector contagion to other financial
intermediaries and markets. In my previous blog on the PIA,
I explained how we updated our approach to take into account
system-wide events, in addition to idiosyncratic scenarios. The
assessment has to be conducted each year for all banks under the SRB’s
remit as part of regular resolution planning and will be repeated in
case a bank is failing or likely to fail. In this blog, I will focus on
how the SRB will assess cross-sector contagion, namely from the banking
sector to the insurance one.
The public interest assessment is a key safeguard in bank resolution, to protect taxpayers and financial stability.
Financial stability could be considered at risk if a bank’s sudden
market exit could have significant adverse effects on financial markets.
This analysis needs to take into account the direct impact on
counterparties of the failing bank, as well as the indirect impact on
other institutions in the financial system.
The bank-insurance nexus is of
particular interest for a number of reasons. First, the insurance sector
holds a non-negligible amount of assets issued by the banks under the
SRB’s remit. Moreover, the SRB is the resolution authority for a number
of bank-insurance conglomerates, where we need to fully understand the
intra-group interconnectedness and potential for contagion. Lastly,
there are examples from the past where a bank’s failure has led to
financial problems in the insurance sector.
The SRB is working with the European
Insurance and Occupational Pensions Authority (EIOPA) to test a
methodology for assessing contagion from a bank’s failure in the
European insurance sector. The first results of this cooperation were
recently published in the EIOPA Financial Stability Report.
The results confirm that insurers’ exposures towards the banking sector
are material. At the same time, the direct contagion risk, tested in a
‘what-if’ analysis, stemming from an idiosyncratic failure of a bank
under the SRB’s remit, seems to be contained.
There are a number of relevant features
in the analysis. First, it is the first time that a multi-layered
bank-insurance network has been analysed, using Solvency II reporting
data and granular insolvency categories. Second, the simulated
write-down of instruments held by insurance companies was under some
assumptions applied following the national insolvency hierarchy (which
differs across countries). The SRB, together with EIOPA, is considering
how this approach could be further strengthened.
As I mentioned, the interconnection
between insurers and banks, that is, the impact that potential fragility
of insurance companies could have on banks, is particularly relevant in
case of financial conglomerates. The SRB is also building up expertise
in this specific field. A deep understanding of the interdependencies,
as well as of the impact of any policy action, in close cooperation with
the insurance authorities, can pave the ground for a further
improvement of financial stability safeguards.