Households’ investments: Financing of economy and risk analysis perspectives

Paris,November 30th 2010

Adeline Bachellerie

Omar Birouk

OECDWorking Party on Financial Statistics

29 November - 1 December 2010

Directorate General StatisticsDirectorate Monetary & Financial Statistics

1 Financing of the economy perspective

1.1 Primary allocation of households’ financial investments

1.2 Secondary allocation of households’ financial investments

1.3 Sectors ultimately financed by households

2 Risk analysis perspective

2.1 Households’ investments by asset riskiness

2.2 Geographical diversification through financial intermediaries

2.3 Investment horizon and financial intermediaries role

Outline

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1.1 Primary allocation of households’ financial investment s

In light of who-to-whom data from financial accounts, households’ financial investment is mostly channeled through financial intermediaries, especially through:

Insurance Corporations Monetary and Financial Institutions

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Insurance Corporations

Other Financial Instituions

Money Market Funds

Monetary and Financial Institutions

Rest of the World

Households

General Government

Non Financial Corporations

Insurance Corporations

Monetary and Financial Institutions

Non Financial Corporations

Source: Banque de France

Primary allocation of HHs’ financial investment by sector (in % of total assets)

1.1 Primary allocation of households’ financial investments

According to who-to-whom data, the primary allocation of households’ financial assets among non-financial sectors shows that:

French households mainly invest directly in non financial corporations through non-quoted shares and other equity

The share of assets directly held on the rest of the world and general government has regularly decreased over the last 15 years

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Rest of the World

Households

General Government

Non Financial Corporations

Source: Banque de France

Non Financial Corporations

Rest of the World

Primary allocation of HHs’ financial investment among non financial sectors (in % of total portfolio)

1.2 Secondary allocation of households’ financial investments

This part of the study covers 3 years (2007 – 2009) and relies on a security -by-security look-through approach of households’ investments made through life insurance companies and UCITS

Use of detailed statements of life insurance companies’ investments

Cross-referenced with Banque de France securities’ and issuers’ databases and with the CSDB, in order to identify the characteristics of securities

Iterative process to break down UCITS’ portfolio held by other UCITS

But some securities are left for lack of ISIN code => they are allocated to the category entitled “other investments”

Residual UCITS remaining after the look-through algorithm are assumed to be mainly foreign UCITS

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1.2.1 Financial assets held by HHs through life insurance companies (1/2)

In France, in 2009, life insurance contracts account for almost 36% of the households’ financial assets (1400 billions Euros). The security-by-security look-through analysis of these contracts highlights that:

HHs’ financial investment structure remains stable over the period under review with one third of their total investment devoted to domestic sectors

Life insurance contracts finance mainly foreign economies

Non-financial corporations and financial institutions account for approximately the same proportion

Financing of domestic central government represents the largest share with a peak corresponding to the 2008 financial crisis.

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1.2.1 Financial assets held by HHs through life insurance companies (2/2)

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Source : Banque de France

1.2.2 Financial assets held by HHs through UCITS (1/2)

In 2009, UCITS shares account for 5 % of French households’ financial assets (160 billions Euros). The security-by-security look-through analysis of these UCITS shares highlights that:

Households primarily finance domestic economy through their investments in UCITS

The central government sector represents a tiny fraction of the households' investments

The share of financial investment devoted to corporations remains relatively stable around 25 % of the overall investments

Increasing diversification with a peak in 2009 for investments in geographical areas other than France.

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1.2.2 Financial assets held by HHs through UCITS (2/2)

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Source : Banque de France

1.3 Sectors ultimately financed by households

Sectors ultimately financed by households are derived from the analysis of the counterparts sectors in the financial accounts as a whole system:

Higher share of the rest of the world, at the expense of non financial corporations Higher importance of households, lower share of general government debt

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Rest of the World

Households

General Government

Non Financial Corporations

Source: Banque de France

Rest of the World

Non Financial Corporations

Sectors ultimately financed by households (in % of total portfolio)

2.1 Households’ investment by asset riskiness (1)

French households invest mainly in low-risk financial assets: Deposits (including sight deposits, savings accounts and time deposits) Money Market Fund shares Life insurance contracts (excluding unit-linked contracts)

They also invest in riskier (marketable/non marketable) assets: Quoted shares, debt securities, other investment fund shares Non-quoted shares and other equity

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Other

Non-quoted shares and other equities

risky marketable assets

Unit-linked life insurance contracts

Low-risk assets

Sources: Banque de France

Low-risky assets

Sources: Banque de France

Low-risk assets

Risk assets

Households’ financial investment by asset riskiness (in % of total assets)

2.1 Households’ investment by asset riskiness (3)

Focusing on the households’ low-risk portfolio, we observe that it does not show a flat pattern over the last 15 years :

Trend of substitution of life insurance for deposits

Households' financial investment in low-risk assets (% of total assets)

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Life Insurance Reserves Deposits and loans Money Market Fund Shares

Source: Banque de France

2.2 Geographical diversification through financial intermediaries

Diversification is mainly achieved through financial intermediaries. From the security-by-security look through approach we observe:

A growing diversification towards the euro area, for both investments in life insurance contracts and in UCITS

A geographical diversification more pronounced for life insurance contracts than for investments in UCITS.

13Source : Banque de France Source : Banque de France

2.2 Geographical diversification through financial intermediaries (2)

Life insurance contracts are split between euro-denominated contracts (85 % of life insurance contracts outstanding) and unit-linked contracts (15%)

Euros contracts => payments are guaranteed by the insurer / unit-linked contracts => households bear risks since the value of the contracts depends on market indexes

Geographical diversification of unit-linked contracts bear resemblance to that of investments in UCITS => geographical allocation of assets shows a bias in favor of domestic investments when the market risk is supported by households.

14Source : Banque de France Source : Banque de France

2.3 Investments horizon and financial intermediaries role (1)

French households invest more in long term assets

Long term assets are considered to be riskier than short term assets Explains changes in investment horizon over the period

Breakdown of households’ financial assets (in %)

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Long-term assets (Right) Short-term assets (Left) Other

Long-term assets

Short-term assets

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Long-term versus short-term assets

Short-term assets (Left)

Long-term assets (Right)Source: Banque de France

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2.3 Investments horizon and financial intermediaries role (2)

Analysis of weighted average residual maturity for bonds held through life insurance contracts highlights some key aspects to understand what drives the trend

The weighted average residual maturity (excluding perpetual securities) increased for life insurance investments : 7.4 years in 2007, 7.8 years in 2008 to finally reach 8.3 years in 2009

Changes in the term structure of interest rates could explain the lengthening of life insurers’ bonds portfolios, linked to the objective to maintain the level of return

16Source : Banque de France

2.4 Investment horizon and financial intermediaries role

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Reallocation process from financial intermediaries to non financial sectors

Reallocation speed depends on economic and financial environment

Most financial intermediaries directly invest in non-financial sectors (more than 70% of assets are redirected to non financial sectors after one iteration)

Reallocation process trend curve

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Before €

Source: Banque de France

Financial turmoil

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Households’ investments: Financing of economy and risk analysis perspectives

Directorate General StatisticsDirectorate Monetary & Financial Statistics

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