Capturing the Illiquidity Premium
39 Pages Posted: 25 Feb 2020
Date Written: February 9, 2020
This paper studies the restructuring of financial intermediation in the United States since the 2007-09 financial crisis. We show that the largest U.S. life insurers have entered private debt markets as banks refocused on commercial banking, against a backdrop of unconventional monetary policies and tighter bank regulations. Through complex on- and off-balance sheet arrangements, these insurers, many of whom are controlled by private equity firms, are acquiring and deploying vast amounts of annuity capital to capture the illiquidity premium. The new architecture of the financial system features novel forms of lending. That said, life insurers have become more vulnerable to an aggregate shock to the corporate sector.
Keywords: shadow banking, insurance companies, annuities, private debt, private equity, commercial real estate, leveraged loans, collateralized loan obligations
JEL Classification: G23, G12, G18
Suggested Citation: Suggested Citation