How insurers differ from banks: Implications for systemic regulation
Christian Thimann 17 October 2014
Having completed the regulatory framework for systemically important banks, the Financial Stability Board is turning to insurance companies. The emerging framework for insurers closely resembles that for banks, culminating in the design and calibration of capital surcharges. This column argues that the contrasting business models and balance sheet structures of insurers and banks – and the different roles of capital, leverage, and risk absorption in the two sectors – mean that the banking model of capital cannot be applied to insurance. Tools other than capital surcharges may be more appropriate to address possible concerns of systemic risk.
Regulation of the insurance industry is entering a new era. The global regulatory community under the auspices of the Financial Stability Board (FSB) is contemplating regulatory standards for insurance groups that it deems to be of systemic importance. Nine insurance groups received this FSB classification in 2013, and the design of systemic regulation for these groups is now in progress.
insurance, reinsurance, banking, financial intermediation, regulation, systemic risk, maturity transformation, BASEL III, investment, capital, capital requirements, bail-in, loss absorption
Inheritance flows in Sweden, 1810–2010
Jesper Roine, Henry Ohlsson, Daniel Waldenström 08 August 2014
The extent to which lifetime incomes are determined by inherited wealth is a politically sensitive issue, but long-run evidence on this question is limited. This column presents evidence on Swedish inheritance flows since the early 19th century. Despite a long history of aristocracy, accumulated capital was small relative to income in pre-industrial Sweden. In more recent times, Sweden stands out as a country where the return of capital has not automatically translated into a return of inherited wealth.
Thomas Piketty’s book Capital in the Twenty-First Century (Piketty 2014) has received enormous attention since its publication. A fundamental question raised is whether a person’s lifetime income is the result of his or her own efforts or, alternatively, founded on inheritance. Even for those who believe that inequality does not matter as long as it is based on one’s own effort, the potential of a return to high levels of inequality based on inheritance is a totally different matter. To many people, such a development would be much less acceptable than increased inequality per se.
Economic history Europe's nations and regions Poverty and income inequality
Sweden, Inequality, inheritance, wealth, capital, capital accumulation
Capital is not back: A comment on Thomas Piketty’s ‘Capital in the 21st Century’
Odran Bonnet, Pierre-Henri Bono, Guillaume Camille Chapelle, Étienne Wasmer 30 June 2014
Thomas Piketty’s claim that the ratio of capital to national income is approaching 19th-century levels has fuelled the debate over inequality. This column argues that Piketty’s claim rests on the recent increase in the price of housing. Other forms of capital are, relative to income, at much lower levels than they were a century ago. Moreover, it is rents – not house prices – that should matter for the dynamics of wealth inequality, and rents have been stable as a proportion of national income in many countries.
The impressive success of Thomas Piketty’s book (Piketty 2014) shows that inequality is a great concern in most countries. His claim that “capital is back”, because the ratio of capital over income is returning to the levels of the end of the 19th century, is probably one of the most striking conclusions of his 700 pages. Acknowledging the considerable interest of this book and the effort it represents, we nevertheless think this conclusion is wrong, due to the particular way capital is measured in national accounts.
house prices, housing, Inequality, rents, housing bubble, capital, wealth inequality
Capital controls in the 21st century
Barry Eichengreen, Andrew K Rose 05 June 2014
Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.
Capital controls are back. The IMF (2012) has softened its earlier opposition to their use. Some emerging markets – Brazil, for example – have made renewed use of controls since the global financial crisis of 2008–2009. A number of distinguished economists have now suggested tightening and loosening controls in response to a range of economic and financial issues and problems. While the rationales vary, they tend to have in common the assumption that first-best policies are unavailable and that capital controls can be thought of as a second-best intervention.
IMF, capital flows, global financial crisis, capital controls, capital, Macroprudential policy
Selling assets to raise corporate capital
Alex Edmans, William Mann 15 February 2014
All firms need capital. Much research addresses the choice between issuing various types of securities – for example, between issuing debt and equity. However, another method of financing has received relatively little attention – selling non-core assets, such as property, divisions, or financial investments. This article explains the conditions under which an asset sale is the preferred means of raising capital, and highlights how a manager should go about deciding between selling assets and issuing securities.
Asset sales are a means of financing
Financial markets Frontiers of economic research
asymmetric information, capital, adverse selection, information asymmetry, lemons problem, asset sales, financing
Capital shortfall: A new approach to ranking and regulating systemic risks
Viral Acharya, Robert Engle, Matthew Richardson 14 March 2012
The effective regulation of banks requires identification of systemically important financial institutions. This column discusses a method to estimate the capital that a financial firm would need to raise if we have another financial crisis. This measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by US and European regulators.
The most severe impacts of the financial crisis of 2007–09 arose immediately after the failure of Lehman Brothers on 15 September 2008. It is natural to wonder whether the US should have arranged for an orderly rescue of Lehman as it did for Fannie Mae and Freddie Mac the week before and as it did for AIG, Merrill Lynch, Citigroup, Bank of America, Morgan Stanley, Goldman Sachs, Washington Mutual, and Wachovia as well as many smaller and foreign banks over the next days and weeks. How much capital would have been necessary ex post to arrange such an orderly rescue?
Financial markets International finance
banks, systemic risk, capital
The illusion of bank capital
Raihan Zamil 07 May 2011
How much capital should banks hold to cover their risk? This column argues that the preoccupation with capital rules misses a more fundamental concern. No amount of feasible regulatory capital can be an appropriate substitute for robust asset selection and valuation standards of banks.
How much capital should banks hold to cover their risk? That question has been thrown back and forth among policymakers, bankers, and academics for years – and now, with the global crisis still lingering, the debate is more intense than ever.
Financial markets International finance
financial regulation, capital adequacy ratio, capital