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ECB’s Trichet warns of pension fund contagion

EUROPE – European Central Bank president Jean-Claude Trichet has warned that pension funds and insurers could be sources of vulnerabilities that could spread “contagion” in the wider financial system.

Trichet, speaking at the CEIOPS conference in Frankfurt, pointed out that pension funds and insurers might be “sources of vulnerabilities through their increased interdependences and linkages with the banking sector”.

He told delegates that the first “contagion channel” involved banks’ credit risk exposure to funds and insurers. The second was risks related to the bancassurance model. And the third was the “potential destabilising impact of these institutions on financial markets”.

He summarised: “These three sources of vulnerabilities create the potential for problems in the insurance and pension fund sector to significantly disrupt the smooth functioning of the financial system.”

“The credit risk represented by institutional investors appears to be significant,” he said.

And he worried about “growing linkages” between banks and insurers via the bancassurance model which could, under certain conditions, “present a threat to financial stability”. There was also a concern about accounting and regulatory arbitrage between subcomponents of conglomerates.

As for the impact on financial markets, Trichet highlighted the fact that “significant portfolio reallocation or unwinding of major derivative positions” by funds “might have a potential destabilising effect on asset prices”.

Despite all this he acknowledged that pension funds and insurance firms “may play a positive role in safeguarding the stability of thee overall financial system” due to their balance sheet structure and long-term horizon.

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