Financial Stability and the Insurance Sector
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Financial Stability and the Insurance Sector* Jean-Claude Trichet Governor, European Central Bank, Kaiserstrasse 29, D-60066 Frankfurt am Main, Germany. E-mail: [email protected]
This paper focuses on the relevance of the insurance sector for the overall stability of the financial system by outlining the sources of risk and vulnerability facing the industry. The growing interlinkage between insurers and banks is analysed. The paper concludes by identifying some key challenges for the insurance sector. The Geneva Papers (2005) 30, 65–71. doi:10.1057/palgrave.gpp.2510021 Keywords: financial stability; insurance and banking; European Central Bank
Financial systems are becoming ever more complex. Whereas in the past financial stability was mainly associated with banking sector conditions, nowadays the important roles played by other intermediaries such as insurance companies have to be taken fully into account. This article focuses on the relevance of the insurance sector for the overall stability of the financial system. The first section begins by outlining, in general, how situations of financial stability can be characterized and the role that central banks can play in safeguarding it. Next the specific role of the European Central Bank (ECB) and the European System of Central Banks (ESCB) in financial stability is discussed. Then the sources of risk and vulnerability facing the banking and insurance sectors are briefly discussed and some implications for financial stability are derived. After a review of recent developments in the European insurance sector, the links that have been developing over time between the insurance and banking sectors are considered. The next section goes on to look at the responses of the authorities to these interlinkages. Finally, I conclude by identifying some forthcoming key challenges for the insurance sector.
Financial stability and the role of central banks Financial stability is a somewhat elusive concept as is demonstrated by the absence of a widely recognized definition. While it is evident when a financial system is unstable or in a crisis situation, it is much more difficult to assess in normal circumstances whether or not the system is moving towards instability. The definition underpinning financial stability work at the ECB sees it as a condition where the financial system can withstand shocks without giving way to processes that impair the allocation of savings to investments and the processing of payments in the economy.1
* This article is a reworked version of the speech that Mr Trichet delivered as a guest speaker at the 31st General Assembly of the International Association for the Study of Insurance Economics that took place in Madrid from 26 to 29 May 2004. 1 Padoa-Schioppa (2003).
The Geneva Papers on Risk and Insurance—Issues and Practice
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This definition emphasizes that in a situation of instability, the financial system is unable to perform its basic task of providing the financing needed to support real economic processes. It also stresses that to s
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