S&P examines consequences of Basel III and Solvency II

29 February 2012

S&P stated that the world's insurance and banking sectors are interdependent: insurers need to invest the premiums they receive from policyholders safely, while banks need to finance their operations.

In Standard & Poor's Ratings Services' view, the Basel Committee on Banking Supervision's new global standards for banks' liquidity and capital adequacy (Basel III) and the EU's Solvency II Directive could interact with unintended consequences. By tightening the regulatory requirements in the aftermath of the financial crisis, global policymakers may inadvertently damage the cross-sectoral links between insurers and banks.

Through Basel III, regulators are prompting banks to strengthen capital, obtain more long-term financing, and replace existing hybrid capital structures with hybrid instruments that are much more like equity. At the same time, through Solvency II, regulators may be introducing incentives for insurers in Europe to reduce their exposure to banks. So far, insurers have shown little appetite for the enhanced equity features of banks' newer hybrid instruments. If this pattern holds when Solvency II takes full effect, the cost of bank capital may rise, dampening bank credit quality and global economic well being.

Press release

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