Size is everything: Explaining SIFI designations

• Published date: 01 January 2017
• Date: 01 January 2017
• DOI: http://doi.org/10.1016/j.rfe.2016.09.003

Review of Financial Economics 32 (2017) 7–19

Contents lists available at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe

Size is everything: Explaining SIFI designations

Felix Irresbergera,*, Christopher Bierth b,GregorN.F.Weiß

c

aCardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff, CF10 3EU, United Kingdom

bTU Dortmund University, Otto-Hahn-Str. 6, Dortmund D-44227, Germany

cLeipzig University, Grimmaische Str. 12, Leipzig D-04109, Germany

ARTICLE INFO

Article history:

Received 8 December 2015

Received in revised form 9 September 2016

Accepted 16 September 2016

Available online 23 September 2016

JEL classification:

G01

G20

G28

Keywords:

Systemic risk

Interconnectedness

Systemic relevance

Financial stability

ABSTRACT

In this paper, we study the determinants of the systemic importance of banks and insurers during the

financial crisis. We investigate the methodology of regulators to identify global systemically important

financial institutions and find that firm size is the only significant predictor of the decision of regulators to

designate a financial institution as systemically important. Further, using a cross-sectional quantile regres-

sion approach, we find that Marginal Expected Shortfall and DCoVaR as two common measures of systemic

risk produce inconclusive results concerning the systemic relevance of banks and insurers during the crisis.

© 2016 Elsevier Inc. All rights reserved.

1. Introduction

At the climax of the financial crisis of 2007–2009, American Inter-

national Group (AIG) became the first international insurer that

required (and ultimately received) a bailout as regulators considered

AIG to be too systemically important to default. At the time, AIG’s

near-collapse came to the surprise of most analysts and financial

economists as systemic risk was considered to be a problem confined

to banking, but not insurance. As a response to this wakeup-call,

regulators have recently started to realign the regulation of inter-

national insurance companies towards a macroprudential supervi-

sion. Most prominently, on July 18, 2013, the Financial Stability

Board (FSB) in collaboration with the International Association of

Insurance Supervisors (IAIS) published a list of nine Global Sys-

temically Important Insurers (G-SIIs) which will ultimately face

higher capital and loss absorbency requirements. In essence, reg-

ulators deem insurers to be globally systemically important in the

views of regulators if they are of such size and global intercon-

nectedness that their default would trigger severe adverse effects

on the financial sector. Previously, in November 2011, the FSB had

*Corresponding author.

E-mail addresses: irresbergerf@cardiff.ac.uk (F. Irresberger),

christopher.bierth@tu-dortmund.de (C. Bierth), weiss@wifa.uni-leipzig.de (G. Weiß).

similarly identified a set of 29 banks as Global Systemically Impor-

tant Financial Institutions (G-SIFIs). However, the validity of these

classifications and the actual determinants of the decision of reg-

ulators to designate a financial institution as global systemically

important remain relatively unknown.

Until the financial crisis, economists had never expected sys-

temic risks to arise from the insurance sector. In contrast to banking,

insurance companies are not vulnerable to runs by customers and

thus are not subject to sudden shortages in liquidity. Although the-

oretically, one could think of runs on life insurance policies, there

has not been a single example in history for such a run to take

place and cause systemwide defaults of insurers (see, e.g., Eling &

Pankoke, 2014).1Furthermore, even the largest international insur-

ers are significantly smaller in size, less interconnected, and hold

more capital (see Harrington, 2009) than the largest global banks. In

light of this, the case of AIG seems to have been a major exception to

the rule that insurers do not cause systemic risks.

As insurers do not accept customer deposits, they do not face the

risk of a sudden shortage in liquidity due to a bank run. In addition,

insurers in contrast to banks often rely more strongly on long-term

1An “insurer run” is regarded as unlikely by most economists as customers are

often protected by guarantees that are similar to explicit deposit insurance schemes

in banking.

http://dx.doi.org/10.1016/j.rfe.2016.09.003

1058-3300/© 2016 Elsevier Inc. All rights reserved.