Banking can learn from insurance on systemic risk

0ca3a49e-f02b-4ea7-8a10-0039e5789a30Insurers are shrinking their balance sheets and divesting business to escape systemically important status, and so should banks, argues Patrick Jenkins in the FT.

“When Italy’s Generali managed to get itself off the global list of systemically important insurance companies in November, there were cheers in Trieste.

Removal from the nine-strong list of insurers, deemed systemically important financial institutions (Sifis), meant a huge administrative problem evaporated. So did the prospect of tougher Sifi capital requirements from 2019. Generali’s secret had been to shrink and simplify its business. First it sold its US life reinsurance business to France’s Scor. Then it sold Swiss private bank BSI to Brazil’s now troubled BTG Pactual.

The moves convinced regulators at the Financial Stability Board that Generali was no longer a global Sifi (replacing it with another European insurer, Aegon).
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One rule to bind them all

With Solvency 2, the EU has a new prudential rulebook for insurance companies, The Economist reports.

20160102_fnp502“LIKE banks, insurers need a cushion of capital to ensure that they can meet customers’ claims in the event of unexpectedly big payouts or poor investment performance. As at banks, these cushions have at times proved woefully thin. In theory, all that changes on January 1st—in the European Union, at least—when a new set of regulations known as Solvency 2 comes into force. After more than ten years of negotiation, all European insurers will have to follow uniform rules on capital that are designed to make the firms more robust and allow investors and customers to assess their strength much more easily.”

Read the full story here.