European insurance companies have approximately €7500 billion of assets under management of which, approximately 55%1 is invested in both fixed income and loan assets. An insurer’s investment strategy is generally driven by the need for both predictable and stable long term cash flows to meet insurance liabilities. In this regard, insurers are an important source of long term funding for the banking sector and the impact of the proposed Recovery and Resolution Directive on this funding process requires consideration.
Insurers recognise the importance of breaking the link between banks and their sovereigns. However, from an investor perspective, it is important that the proposed bank resolution tools strike a balance between ensuring an appropriate framework for managing resolution and recovery actions and maintaining sufficient incentives to invest in the banking sector. Specifically, the establishment of a bail-in regime could have a significant impact on investment decisions and, as a consequence, have implications for the banking sector’s ability to successfully fund itself. An improperly calibrated bail-in mechanism could not only lead to an increase in the cost of banks’ debt funding but could also restrict banks’ access to long-term financing.