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Banks and non-banks stressed: liquidity shocks and the mitigating role of insurance companies

Author

Listed:
  • Sydow, Matthias
  • Fukker, Gábor
  • Dubiel-Teleszynski, Tomasz
  • Franch, Fabio
  • Gründl, Helmut
  • Miccio, Debora
  • Pellegrino, Michela
  • Gallet, Sébastien
  • Kotronis, Stelios
  • Schlütter, Sebastian
  • Sottocornola, Matteo

Abstract

This paper documents the extension of the system-wide stress testing framework of the ECB with the insurance sector for a more thorough assessment of risks to financial stability. The special nature of insurers is captured by the modelling of the liability side and its loss absorbing capacity of technical provisions as the main novel feature of the model. Leveraging on highly granular data and information on bilateral exposures, we assess the impact of liquidity and solvency shocks and demonstrate how a combined endogenous reactions of banks, investment funds and insurance companies can further amplify losses in the financial system. The chosen hypothetical scenario and subsequent simulation results show that insurers’ ability to transfer losses to policyholders reduces losses for the entire financial sector. Furthermore, beyond a certain threshold, insurance companies play a crucial role in mitigating both direct and indirect contagion. JEL Classification: D85, G01, G21, G23, L14

Suggested Citation

  • Sydow, Matthias & Fukker, Gábor & Dubiel-Teleszynski, Tomasz & Franch, Fabio & Gründl, Helmut & Miccio, Debora & Pellegrino, Michela & Gallet, Sébastien & Kotronis, Stelios & Schlütter, Sebastian & So, 2024. "Banks and non-banks stressed: liquidity shocks and the mitigating role of insurance companies," Working Paper Series 3000, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20243000
    Note: 448291
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    contagion; financial stability; fire sales; insurance companies; interconnectedness; stress test;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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