Governments around the world have been applying financial repression—part of which is to use new regulations to force financial institutions to funnel private savings into government debt.
We see this also happening in Europe where insurance firms are being ‘incentivized’ by new rules to invest in government debt than in equities.
From Researchrecap.com (bold highlights mine)
Fitch Ratings believes that Solvency II, the new regulatory regime for European insurers from 1 January 2013, is set to transform how insurers allocate their investments.
European insurers are the largest investors in Europe’s financial markets, holding EUR6.7trn of assets, including more than EUR3trn of government and corporate debt. Any reallocation of insurers’ asset portfolios could therefore lead to fundamental shifts in demand and pricing for several asset classes. The new rules will force insurers to value assets and liabilities at market value when determining their solvency position, and to hold explicit capital to reflect shortterm volatility in the market value of assets.
Fitch expects a shift from long-term to shorter-term debt; an increase in the attractiveness of higher-rated corporate debt and government bonds, and shift away from equity; and a preference for assets based on the long-term swap rate.
People hardly see it, but rules are being utilized to skew resource allocation for the benefit of political forces.
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