Pension fund contagion fears

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 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 said 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 said: “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.” He added:“The credit risk represented by institutional investors appears to be significant.”
He was worried about “growing linkages” between banks and insurers via the bancassurance model which could “present a threat to financial stability”.

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