Bundle 04

risk of impairment of large parts of the finacial system and widespread financial instability with negative fallout for the real economy

Conditional VaR

Systematic Capital Shortfall

Network approach (Network of interlinkages between financial institutions)

Similarities

1. Banks and Insurers are both financial intermediaries (financial items appear on both sides of BS)

2. Both are large-scale investors in financial markets

Differences

1. Interconnectedness (Banks are institutionally connected through interbankmarket. // Insurers are not connected)

2. Maturity Transformation & Leverage

   • Banks have shortterm deposits and invest longterm

   • Banks are leverage instutions that permit leverage to their customers

   • Insurance try to match maturity

3. Exposure to Liquidity risk

   • banks are liquidity short

   • Insurers are liquidity rich

4. Role of money and payment system

   • Banks crreate money and operae the payment system

   • Insurence: no money creation or payment system

THIS IS WHY REGULATION IS DIFFERENT

Only applies to banks, because Insurers are systematically relevant but not systematically risky

Banks are relevent and risky

1. size

2. interconnectiveness

3. complexity

4. corss.jurisdiction

5. substitubility (critical or not) - can it be substituted by competitors or not

capital and capital surcharge

Systematic banks need to hold extra capital that serves as a buffer