Are insurers SIFIs? A MGARCH model to measure interconnectedness

Abstract

We examine whether insurance companies should, like banks, be regulated as Systemically Important Financial Institutions (SIFIs). For this purpose, we empirically model the interconnectedness between different sectors of the financial system with a multivariate GARCH model using the information content of Credit Default Swap (CDS) prices. Our findings suggest that large insurers transmit risks to other parts of the financial system. The magnitude of these contagion effects is substantially lower than those of large banks that are currently treated as SIFIs.

Keywords:

• systemic risk
• CDS spreads
• interconnectedness
• MGARCH

JEL Classification:

• G21
• G22
• G28

Acknowledgements

We are grateful to the participants at the Midwest Finance Conference 2012 in New Orleans and at the research seminar of the Deutsche Bundesbank for their comments and suggestions on an earlier version of this article. This article represents the authors’ personal opinions and not necessarily those of the Deutsche Bundesbank.

All remaining errors are the sole responsibility of the authors.

Notes

¹ See BCBS (2011).

² See www.financialstabilityboard.org

³ See www.iaisweb.org

⁴ For more details on the database, see Podlich and Wedow (2012).

⁵ We use total assets from Bankscope and fix size groups using balance sheets for 2007. We also use indices where we determined the size groups using total assets for 2009 and indices with total assets for different years. The results did not change materially and can be obtained upon request.

⁶ We use variables for Europe as the majority of firms in our sample are from this region. We also tested a number of further control variables such as the interbank interest rate London Interbank Offered Rate (LIBOR), which are insignificant in all our estimations.

⁷ The dynamic of the conditional quasi-correlation parameters that weight the nonlinear combinations of the conditional variances follows a GARCH-like process as specified in Engle (2002).

⁸ The results can be obtained from the authors upon request. All SI banks are among the large banks and 16 of the 28 SI banks are dealer banks.