German insurers set for triple hit if stocks fall, Bundesbank says

Bundesbank: German Insurers Could Take Triple Hit If Stocks Decline

Bundesbank Financial Stability Review Highlights

Triple Whammy Risk for German Insurers

FRANKFURT, Nov 12 (Reuters) - German insurers are set for a triple whammy if the stock market drops due to their large exposures to investment funds, the Bundesbank said on Thursday.

Other Financial Stability Concerns

Lax Mortgage-Lending Standards

In its Financial Stability Review, the German central bank also warned about lax mortgage-lending standards and insufficient US dollar buffers at the country's largest banks.

Global Market Volatility and Regulatory Response

Volatility in US equity markets, where investors have begun to question the lofty returns expected from AI-related investments, has kept regulators worldwide on alert over broader financial stability risks.

Insurers' Exposure to Investment Funds

Direct and Indirect Effects of a Stock Market Fall

The Bundesbank delved into the links between German insurers and investment funds to map out the direct and indirect effects of a stock market fall.

It found that even if markets fell modestly -- with stocks down 7% and bonds by 1% -- the loss would be tangible at 3.5% of net assets for funds and 1.4% of security investments for insurers.

Sources of Losses for Insurers

The latter would come from three sources: losses from securities insurers hold directly, an indirect effect from their holdings of investment funds and a further effect from these funds' fire sales of assets to meet redemptions. 

"The insurance sector is particularly relevant here, as it is a major investor in the capital markets and holds substantial fund units," the Bundesbank said.

"The indirect losses resulting from contagion and amplification effects from the fund sector are substantial."

Additional Risks Highlighted

Mortgage Borrowing Risks

Elsewhere in the review, the Bundesbank said 38% of German home-buyers were borrowing more than 90% of the value of the property, increasing the risk of losses in the event of defaults.

US Dollar Liquidity Shortfalls

Echoing warnings from other regulators, the Bundesbank also found large German banks did not have enough dollars to withstand 30 days of steady outflows -- the stress scenario that regulators use as a standard gauge of safety.

It estimated these banks would collectively require approximately $97 billion in additional high-quality liquid assets in US dollars to cover the outflows.

(Reporting by Francesco Canepa, Editing by Louise Heavens and Saad Sayeed)