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April 16, 2024 at 01:39 PM
What You Need to Know
- Viral Acharya and colleagues examine the threads that bind financial services sectors together.
- Life insurers have argued that they reduce financial system risk.
- Co-author Nicola Cetorelli is a non-bank financial institution researcher at the New York Fed.
If financial disasters pull too hard on the banks, that could choke the life insurers, and asset sales at life insurers could then tighten the rope around the banks’ necks even more.
Three economists touch on possible financial knots of doom in a new working paper about ways that problems at “non-bank financial intermediaries” — including mutual funds, pension plans and broker-dealers, as well as life insurers — could make struggling banks die faster.
“Not only can NBFIs be sources of systemic risk, but their fate in a crisis is intricately interwoven with that of banks,” according to Viral Acharya, Nicola Cetorelli and Bruce Tuckman.
Thinking harder about systemic risk at life insurers and other NBFIs and subjecting them to additional regulatory oversight could contribute to financial stability, the economists argue.
What it means: U.S. bank regulators’ efforts to get more say over life insurers and other NBFIs continue to simmer.
Successful regulator efforts to increase their role in insurance regulation could decrease some types of risk at life insurers while increasing other forms of risk, increasing the cost of the insurers’ products and narrowing the scope of the types of products available.
The paper: Acharya is the C.V. Starr professor of economics at New York University’s business school., His job, then, is named after Cornelius Vander Starr, the founder of the company that became AIG, the insurer with the failed collateralized debt obligation business that helped set off the 2008-2009 financial crisis.
Tuckman is an NYU finance professor who served as chief economist at the Commodity Futures Trading Commission. Cetorelli is head of non-bank financial institution studies at the Federal Reserve Bank of New York.
The economists published their working paper on the website of the National Bureau of Economic Research.
A working paper is an academic paper that has not yet been through a full, formal peer review process.
Life insurers and financial system risk: Life insurers have argued that they tend to tamp down systemic risk and not cause it, because they are long-term investors with products designed to discourage customers from pulling cash out quickly due to shifts in the stock market or interest rates.
