Life and Annuity Issuers Could Help Break the Banks: Economists
Life insurers note that the AIG business best known for its role in the 2008-2009 financial crisis was a financial trading business, not a business involved in providing life insurance and annuities.
The Acharya team’s view: Acharya and his colleagues contend that life insurers and other NBFIs could propagate or even amplify systemic risk in a major crisis because banks and NBFIs have transformed.
U.S. banks and U.S. NBFIs now operate in such a way that banks handle the activities that benefit most from bank deposit insurance, NBFIs handle the activities that bank regulators dislike, and the banks and NBFIs are connected in ways that regulators may not fully understand, the economists write.
In addition to life insurers, broker-dealers, mutual funds and pension plans, their list of NBFIs includes asset-backed securities issuers, equity real estate investment trusts, finance companies, government-sponsored enterprises and agencies, money market funds, mortgage real estate investment trusts, property-casualty insurers and other types of financial businesses.
The economists include charts showing how each type of financial institution holds assets issued by the other types of financial institutions.
Broker-dealers, for example, owed $5.4 trillion in the first quarter of 2023 and borrowed $1.4 trillion of that from banks, according to the economists.
Life insurers have issued a total of $9.2 trillion in bonds, including $6.7 trillion in bonds held by households, governments and non-financial corporations, the economists write.
The economists give life insurers’ investments in bank loans as an example of a mechanism that could amplify the effects of a financial crisis on banks.
“A shock impacting non-financial firms induces asset managers to sell Treasuries and corporate bonds,” the economists write. “The resulting price pressure on corporate bonds induces life insurance companies to sell bank loans. The portfolios of banks suffer losses from both the direct, or Round 1, impact of falling prices of Treasures and from the indirect, or Round 2, impact of falling prices of bank loans.”
The economists add that researchers should look into “imperfections of the current regulatory regime” that explain why banks are pushing some activities into the arms of NBFIs and why NBFIs are so profitable.
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