Insuring the Financial System against Insurers: A Macroprudential Framework

Abstract

The recent global financial crisis brought numerous financial institutions to the brink of collapse and led authorities to take far-reaching measures to safeguard financial stability. The causes of the crisis have been extensively analysed and lessons have been drawn. One lesson stands out: the need to strengthen the supervision of the financial system as a whole, from a macroprudential perspective. As a complement to microprudential supervision, such a perspective considers potential systemic interactions between the individual institution and the broader financial system. This lesson is of particular relevance for the banking sector, as banks are more likely to be considered systemically important than insurers. By nature, banks are highly interconnected through the interbank money market, play a pivotal role in the payment system and are exposed to liquidity risk. Nevertheless, contagion channels also exist between the insurance sector and other parts of the financial system, both in theory and practice.