scholarly journals What's Wrong with Annuity Markets?

2021 ◽  
Vol 2021 (044) ◽  
pp. 1-69
Author(s):  
Stéphane Verani ◽  
◽  
Pei Cheng Yu ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rate Risk ◽  
Capital Requirements ◽  
Regulatory Capital ◽  
Life Insurers ◽  
Rate Risk ◽  
Interest Rate Risk Management ◽  
Rate Environment ◽  
Life Annuities ◽  
The Cost

We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight per- centage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

Economic Consequences of the AOCI Filter Removal for Advanced Approaches Banks

2019 ◽  
Vol 94 (6) ◽  
pp. 309-335 ◽  
Author(s):  
Sehwa Kim ◽  
Seil Kim ◽  
Stephen G. Ryan
Keyword(s):  
Interest Rate ◽  
Interest Rate Risk ◽  
Economic Consequences ◽  
Data Availability ◽  
Regulatory Capital ◽  
Management Options ◽  
Interest Rate Spread ◽  
Loan Supply ◽  
Other Comprehensive Income ◽  
Interest Rate Risk Management

ABSTRACT We examine economic consequences of U.S. bank regulators' phased removal of the prudential filter for accumulated other comprehensive income for advanced approaches banks beginning on January 1, 2014. The primary effect of the AOCI filter is to exclude unrealized gains and losses on available-for-sale securities from banks' regulatory capital. We predict and find that, to mitigate regulatory capital volatility resulting from the filter removal, advanced approaches banks increased the proportion of investment securities classified as held-to-maturity, thereby limiting their financing and interest rate risk management options, and they decreased securities risk, thereby reducing their interest rate spread. We further predict and find that these banks borrow more under securities repurchase agreements potentially collateralized by held-to-maturity securities and reduce loan supply owing to their reduced financing options, and that they increase loan risk to mitigate the decrease in their interest rate spread. JEL Classifications: G21; G28; M41; M48. Data Availability: Data are available from the public sources cited in the text.

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