- 25 November 2015
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2015Details
- The current environment of protracted low interest rates poses major challenges to euro area insurance companies. This special feature discusses how a prolonged low-yield period might affect the profitability and the solvency of euro area insurers. In the article, it is argued that if interest rates were to stay low for a long time, this could have material implications for the profitability and the solvency of many insurers. However, it is also shown that the impact of low interest rates is likely to differ markedly across insurance companies depending on their business model and balance sheet structure. In particular, the impact is expected to be highest for small and medium-sized life insurers with large government bond portfolios and high guarantees to policyholders that reside in countries where these guarantees are rigid and where contracts embed a long time to maturity.
- JEL Code
- G00 : Financial Economics→General→General
- 29 May 2019
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2019Details
- Uncertainty associated with hard-to-value securities on bank balance sheets can affect market perceptions of banks, especially during periods of stress. Fair value assets on bank balance sheets are classified into three categories: (i) those which are easy to value and based on quoted market prices (level 1 (L1) assets); (ii) those that are harder to value and only partially derive from quoted market prices (level 2 (L2) assets); and (iii) those that are particularly complex and the valuation of which is based on models instead of observed prices (level 3 (L3) assets). While the accounting standards provide the principles for the allocation of assets to the L2/L3 categories, they also leave some room for interpretation, which can result in different choices across banks. Valuation uncertainties can be problematic in times of stress should they lead investors to mistrust the value of banks’ assets, and in turn trigger liquidity or deleveraging pressures – not least if valuations behave in a correlated manner across banks or are concentrated in systemic banks. Worsening market liquidity conditions that would possibly also lead to reclassifications of assets into the L3 category could further amplify the effect. Against this background, this box first looks at the magnitude and distribution of L2/L3 assets in euro area banks’ balance sheets, and second at their impact on market perceptions of banks through the lens of price-to-book (P/B) ratios during normal and stressed times.
- 29 May 2019
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2019Details
- This special feature discusses the channels through which climate change can affect financial stability and illustrates the exposure of euro area financial institutions to risks from climate change with the help of granular data. Notwithstanding currently limited data availability, the analysis shows that climate change-related risks have the potential to become systemic for the euro area, in particular if markets are not pricing the risks correctly. A deeper understanding of the relevance of climate change-related risks for the euro area financial system at large is therefore needed. Better data availability and comparability and the development of a forward-looking framework for risk assessments are important aspects of this work going forward.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G20 : Financial Economics→Financial Institutions and Services→General
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 20 November 2019
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2019Details
- Scarce and inconsistent information on the climate-related risk embedded in assets makes the pricing of climate risk difficult for investors and authorities.Recent studies have found that environmental disclosures can affect the market valuation of non-financial businesses operating in sectors that are sensitive to the risks related to the transition to a low-carbon economy. But the impact is less clear for financial institutions. This box investigates climate-related disclosures of large euro area banks and insurers and their impact on stock market valuations.