A meeting of the minds

Swiss Re and London School of Economics (LSE) join forces to research monetary policy and long-term investment

Swiss Re's research partnership with LSE has set out to explore the concern on the changing structure of central bank balance sheets, and what this has meant for financial markets. During the financial crisis, many central banks expanded their asset holdings to provide monetary accommodation and consequently support economic activity. With persistently low interest rates, central banks may turn to more frequently and rely for longer on their balance sheet as an instrument of policy, raising questions both about the type of assets to hold and structure of liabilities.

The second aspect of the Swiss Re-LSE collaboration is dealing with the effect of loose monetary policy on the incentives for structural reforms across Europe. The Eurozone crisis revealed vulnerabilities in Europe's social model. The continent is home to only 8% of the world's population, yet produces 50% of all social payments globally, such as public pensions, healthcare benefits and public education. These benefits, while thoroughly desirable social achievements, do come at a large cost, unfortunately reflected in high taxation and stubborn budget deficits. The resulting fiscal tightening accompanied structural reforms in public finances and social sectors across Europe. For example, in 2010-2012, two-thirds of European Union members managed at least one significant structural reform. But since then, the ECB's loose monetary policies have not incentivized making further progress on structural reforms.

Moral hazard

This policy has allowed governments to borrow at bargain costs, reducing their incentive to reform their economies. Because there is a mixed picture across Europe, especially when comparing Eurozone and non-Eurozone countries, these differences can be leveraged to conduct comparative analysis on the effects of loose monetary policy on structural reforms.

Says Jerome Haegeli, Swiss Re's Head of Investment Strategy: "Central banks' dominant role in financial markets is not sustainable. The costs are outweighing the benefits. Low interest rates are a “tax” on savers and long-term investors alike. To increase financial market resilience, private capital markets should be strengthened. Currently, the allocation of private sector's risk capital is distorted and not put to best use for financing the real economy."

Supporting financial resilience

Re/insurance supports financial resilience by acting as a shock absorber and promoting growth through its core businesses. This is particularly important in a challenging and volatile macro-economic environment.

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