Subsidised Illiquidity Insulators -The Effect of FHLB Membership on Life Insurers' Strategic Asset Allocation
Type
conference paper
Date Issued
2024
Author(s)
Abstract
Over the past decade, life insurers have significantly increased their holdings of illiquid alternative assets in pursuit of higher yields. This study explores the drivers behind this trend, demonstrating that it is not solely due to the insurers' illiquid liability structure but is also influenced by an implicit liquidity backstop provided by the Federal Home Loan Bank System (FHLB). Our analysis reveals that the "liquidity-of-last-resort" channel provided by the FHLB prompts life insurers to shift about 3% of their assets under management from liquid assets towards illiquid assets ex-ante, predominantly non-housing related assets such as non-residential mortgages, non-mortgage-related asset-backed securities and other long-term investments such as hedge funds and private equity partnerships. As the FHLB was initially established to support residential real estate financing, this finding is potentially at odds with the public's expectation regarding the role of the institution. Our results contribute to a broader literature on publicly funded liquidity relief programs for financial institutions, illustrating how the fungibility of the liquidity support provided can lead to unintended consequences.
Keywords
Federal Home Loan Bank
Illiquidity Premium
Lender of Last Resort
Life Insurance
Deferred Annuities
General Account Investments
Housingrelated Assets G11
G22
G28
G32
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Subusidised_Illiquidity.pdf
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