Banks have greater systemic risk than insurers: report

Banks carry more systemic risk than the insurers, with greater exposure to credit default swaps and derivatives with a greater reliance on short-term borrowing, according to a recently released report from The Geneva Association. 

In a press release, the Geneva-based insurance think tank published its cross-industry analysis of 28 “Global Systemically Important Banks” (G-SIBs) versus 28 insurers.

None of the big six Canadian banks were G-SIBs, while Toronto-based Manulife Financial Corp. was one of the 28 insurers whose financial data was studied.

“As insurance liabilities are substantially matched against their assets, an insurance balance sheet is much less systemically risky than that of a bank of comparable size,” according to the association.

It notes that the average bank writes 158 times the value of gross notional credit default swaps as the average insurer. The analysis found that short-term funding as a percentage of total assets of the banks studied was 6.5 times higher than short-term funding as a percentage of the insurers assets, noting that the practice of borrowing short to lend long “is central to the business model of many banks and is a principle source of their systemic risk.”

The Geneva Association defined short-term funding as “the absolute sum of short-term borrowing, commercial paper issued, certificates of deposit issued, gross value of repos and gross value of securities lent.”

Another indication of systemic risk cited by the report was the exposure to derivatives.

“Banks carry 219 times more gross derivative exposure than the insurer average with even the lowest ranked banks carrying 66 times more gross derivative exposure than the average insurer,” according to the report, which added that banks on average owed 68 times more than insurers on gross negative derivatives and are owed more than 70 times more from derivatives counterparties than insurers.

“If issues develop in derivative markets it is more likely to have an impact on banks than insurers.”

The 28 G-SIBs studied were the Bank of America, Bank of New York Mellon, Bank of China, Barclays, BBVA, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Group BPCE, Group Credit Agricole, HSBC, ING Bank, JP Morgan Chase, Mitsubishi UFJ FG, Mizuho FG, Morgan Stanley, Nordea, Royal Bank of Scotland, Santander, Societe Generale, Standard Chartered, State Street, Sumitomo Mitsui FG, UBS, Unicredit Group and Wells Fargo.

In addition to Manulife, the insurers studied were Aegon, AIA, Allianz, AMP Ltd., Aviva, AXA, Berkshire Hathaway, China Life, CNP Assurances, Dai-ichi Life, Generali, Groupama, Legal & General, Hartford, MetLife, Munich Re, Nippon Life, Old Mutual, Prudential Financial, Prudential plc, Standard Life, Sun Life Financial, Swiss Re, Swiss Life, Talanx, Tokio Marine and Zurich. Additional benchmarks used were American International Group Inc.’s values in 2007 and June of 2012.