From a success story to a tale of woe?

How ultra-easy monetary policy is now hurting almost all concerned

A decade ago, central bankers came riding to the rescue during the financial crisis. Financial markets have since bounced back.

Asset price bubbles

In a nutshell, the low yield environment post-2008 has spurred investors to shift from investment grade into higher yielding assets and emerging market bonds. Warning of consequent asset price bubbles, Swiss Re experts claim some asset class segments look particularly overvalued now, including collateralised loan obligations (CLOs), high-yield corporate credit and leveraged loans.

Housing markets appear especially vulnerable to asset bubbles, such as those in London, China and in some Scandinavian countries. The longer central banks hold their current monetary policy course, the longer these risks will continue to build up, argues Swiss Re.

Savers penalised…

Low interest rates and the strong performance of financial assets due to loose monetary policy are also hurting savers. Unconventional central bank policies not only affect households' interest-bearing assets but other investments such as equity and real estate. In short, households are being ‘taxed’ as they do not earn interest on their deposits that they otherwise would. Clearly, low interest rates also reduce debt costs, however the total cumulative net “tax” on all US households amounts to roughly USD 470 billion. Meanwhile, wealthier savers have benefited more from the equity rally with the top 1% having 50% of their financial assets invested in equities. This suggests that monetary policy and central bank asset purchases have exacerbated economic inequality via equity price inflation.

…and Institutional investors

Institutional investors such as re/insurers and pension funds hold a significant portion of their assets in fixed income securities given their business need to match long-term liabilities. As such, low interest rates have put a severe dent in their investment income. For example, although the guaranteed life insurance credit rate has declined in recent years, it's still significantly above the respective 10-year government bond yield.  Had US Treasuries (or German Bunds) been trading closer to their ‘fair value’, running yields would have been roughly 0.5–1 percentage points higher on average for the 2008–2013 period. Given re/insurers’ allocation to fixed income assets of 50–60% this would have translated into roughly USD 20–40 billion additional income overall for both US and European insurers.

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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