OFR_2016_Financial-Stability-Report

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Figure 55. Life Insurance Securities Lending Activity ($ billions) and Insurer Participation (number of insurers) More insurers are participating in securities lending 90 80 70 60 50 40 30 20 10 0 Insurers engaged in securities lending (left axis) Securities lending activity (right axis) 2010 2011 2012 2013 2014 2015 Sources: SNL Financial LC, OFR analysis Figure 56. SRISK Capital Shortfall ($ billions) The median U.S. G-SII SRISK measure is above that of the median U.S. G-SIB 80 70 60 50 40 30 20 10 Median U.S. G-SIB Median U.S. G-SII 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: SRISK is a widely cited measure of a financial firm’s contribution to systemic risk, and is an estimate of the capital a firm would need in a severe market decline. G-SII stands for global systemically important insurer. G-SIB stands for global systemically important bank. Sources: The Volatility Laboratory of the NYU Stern Volatility Institute (https://vlab.stern.nyu.edu), OFR analysis 60 50 40 30 20 10 0 and Zhu, 2011). These include conditional Value-at- Risk (CoVaR), distress insurance premium (DIP), and SRISK (see Systemic Risk Metrics). All three rely on publicly available market and financial data, including the market value of equity; book value of equity, assets, and liabilities; and control variables. Using these metrics, the contribution to systemic risk from U.S. global systemically important insurers (G-SIIs) appears to be rising. In some cases, it may be higher than for some U.S. global systemically important banks (G-SIBs) (see Kaserer and Klein, 2016). Figure 56 shows the SRISK capital shortfall measure for the median U.S. G-SIB and median U.S. G-SII. For example, the contribution to systemic risk of the median U.S. G-SII based on the SRISK measure has steadily increased during the past decade. As of March 2016, it stood above that of the median U.S. G-SIB pre-crisis. Figure 57 compares several large U.S. insurers to six of the U.S. G-SIBs. As of June 2016, two of the insurers, Prudential and MetLife, were among the top five riskiest firms according to SRISK and the top six according to DIP. These insurers rank above Goldman Sachs and Morgan Stanley based on SRISK. They rank roughly equal to those investment banks based on DIP. These market-based measures of systemic risk, combined with other factors, suggest the need for vigilance in monitoring the risks of some large U.S. insurers (see Drivers of Insurers’ Systemic Risk Indicators). Regulatory Policies Improving Regulators have taken several policy steps to address the risks posed by insurance companies since the financial crisis. These actions include new requirements for firms that are nonbank financial companies designated by the Financial Stability Oversight Council, the Federal Reserve’s proposed capital standards for insurers under its supervision, and a requirement that insurers provide state regulators with a risk and solvency assessment. In June 2016, the Federal Reserve proposed enhanced prudential standards for designated insurers related to liquidity and risk management. It also proposed capital 64 2016 | OFR Financial Stability Report
Systemic Risk Metrics Three widely used metrics take different approaches to measuring systemic risk: n n n Conditional Value-at-Risk (CoVaR). An institution’s contribution to systemic risk, calculated as the difference between the Value-at-Risk of the financial system when the firm is under distress and the VaR of the system when the firm is in its regular, median state (see Adrian and Brunnermeier, 2016). Distress insurance premium (DIP). The hypothetical contribution a financial institution would make to an “insurance premium” that would protect the whole financial system from distress (see Huang, Zhou, and Zhu, 2011). SRISK. The capital that a firm is expected to need if there is another financial crisis. SRISK is short for systemic risk (see Brownlees and Engle, 2016). standards for designated insurers and for other insurance firms under its supervision. Insurance stress testing. The National Association of Insurance Commissioners’ Own Risk and Solvency Assessment (ORSA) model law went into effect on Jan. 1, 2015. As of Oct. 26, 2016, 40 states have adopted the model law. It requires insurers to analyze reasonably foreseeable and material risks that could affect an insurer’s ability to meet policyholder obligations under normal and severe stress scenarios. Submissions began in January 2016. Large and medium-size U.S. insurers and insurance groups must perform an ORSA at least annually. The ORSA framework differs in several ways from the U.S. bank stress tests or the EU’s insurance company stress tests. Unlike these stress tests, the ORSA process does not routinely prescribe a consistent set of scenarios, stress tests are solely performed by firms as opposed to regulators, and there is no standardized reporting template for results. Also, although the ORSA framework is applied on a group-wide basis, there is no requirement that firms’ own stress testing be performed on either the parent or on a consolidated basis. Existing resolution framework. The risk of industry-wide problems due to common factors such as low Figure 57. Normalized Systemic Risk Measures (percent share of systemic risk) Some large insurers appear to be as risky as some U.S. G-SIBs JPMorgan Chase Bank of America Citigroup Wells Fargo MetLife Prudential Morgan Stanley Goldman Sachs AIG Berkshire Hathaway Lincoln National Hartford Financial American Financial Unum Group Travelers Allstate CNA Financial SRISK CoVaR DIP 0 10 20 30 Note: Data as of June 30, 2016. The normalized systemic risk measure is calculated as the proportion of the total systemic risk of the sample set attributable to a given firm. Names of insurers are in bold type. G-SIB stands for global systemically important bank. SRISK, conditional Value-at-Risk (CoVaR), and distress insurance premium (DIP) are measures of systemic risk. Sources: Bloomberg Finance L.P., Markit Group Ltd., the Volatility Laboratory of the NYU Stern Volatility Institute (https://vlab.stern.nyu. edu), OFR analysis Key Threats to Financial Stability 65
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OFFICE OF FINANCIAL RESEARCH 2016 F
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Contents Executive Summary ........
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Chapter 2 provides deeper analysis
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of sharp decreases in U.S. equity a
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1 Financial Stability Assessment Ov
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Figure 3. Real GDP Growth (year-ove
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Figure 8. Ten-Year U.S. Treasury Yi
Page 19 and 20: Monitoring Shadow Banking Risks The
Page 21 and 22: An earlier OFR paper proposed an ac
Page 23 and 24: Figure 17. Size, Liquidity, and Con
Page 25: Figure 19. Top Systemic Risk Scores
Page 28 and 29: The analysis pointed to seven key t
Page 30 and 31: could. In early 2016, investor conc
Page 32 and 33: earnings or share issuance. But red
Page 34 and 35: Fund Monitor, the OFR assessed expo
Page 36 and 37: 2.2 Risks in U.S. Nonfinancial Corp
Page 38 and 39: Figure 31. U.S. Nonfinancial Corpor
Page 40 and 41: Figure 36. U.S. Corporate Bond Defa
Page 42 and 43: Commercial Real Estate Prices Have
Page 44 and 45: 2.3 Cybersecurity Incidents Affecti
Page 46 and 47: Hackers Breach Bangladesh’s Centr
Page 48 and 49: Figure 42. Banks that Include an Op
Page 50 and 51: The industry is working with the pu
Page 52 and 53: Figure 46. U.S. Financial Regulator
Page 54 and 55: 48 2016 | OFR Financial Stability R
Page 56 and 57: eleased the results of an unprecede
Page 58 and 59: Figure 49. CCP Default Waterfall ($
Page 60 and 61: Figure 50: CCP Ratios and Amounts f
Page 62 and 63: cause more-prudent CCPs to appear m
Page 64 and 65: 2.5 Pressure on U.S. Life Insurance
Page 66 and 67: The experience of Japan’s life in
Page 68 and 69: 2015). These benefits are effective
Page 72 and 73: Drivers of Insurers’ Systemic Ris
Page 74 and 75: 2.6 Systemic Footprints of Largest
Page 76 and 77: Interest Rates and Derivatives Expo
Page 78 and 79: Figure 63. Components of U.S. G-SIB
Page 80 and 81: Figure 66. Five-Year Changes to G-S
Page 82 and 83: 2.7 Deficiencies in Data and Data M
Page 84 and 85: Figure 68. Examples of Key Post-Cri
Page 86 and 87: Broader Adoption of Data Standards
Page 88 and 89: Better Regulatory Sharing Needed Th
Page 90 and 91: The U.S. Census Bureau surveys publ
Page 92 and 93: The group will also consider how th
Page 94 and 95: and contracts would be crucial. The
Page 96 and 97: Figure 72. Scaling of Data Validati
Page 99 and 100: Glossary 10-Year, 10-Year Forward R
Page 101 and 102: Conditional Value-at-Risk (CoVaR) C
Page 103 and 104: Fire Sale Form N-MFP Form PF Fundin
Page 105 and 106: Liquidity Risk Liquidity Transforma
Page 107 and 108: Pension Funded Ratio Pension Risk T
Page 109 and 110: Stress Test Supplemental Leverage R
Page 111 and 112: Bibliography Adrian, Tobias, and Ma
Page 113 and 114: Board of Governors of the Federal R
Page 115 and 116: www.richmondfed.org/~/media/richmon
Page 117 and 118: Her Majesty’s Government and Mars
Page 119 and 120: Paul, Ruma. “Bangladesh hopes to
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Zetter, Kim. “That Insane, 18M Ba
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