Directorate General Statistics Directorate Monetary Financial Statistics OECD

Directorate General Statistics Directorate Monetary & Financial Statistics OECD Working Party on Financial Statistics 29 November - 1 December 2010 Households’ investments: Financing of economy and risk analysis perspectives Paris, November 30 th 2010 Adeline Bachellerie Omar Birouk

Outline 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 2

1. 1 Primary allocation of households’ financial investment s v In light of who-to-whom data from financial accounts, households’ financial investment is mostly channeled through financial intermediaries, especially through: Ø Insurance Corporations Ø Monetary and Financial Institutions Primary allocation of HHs’ financial investment by sector (in % of total assets) 3

1. 1 Primary allocation of households’ financial investments v According to who-to-whom data, the primary allocation of households’ financial assets among non-financial sectors shows that: Ø French households mainly invest directly in non financial corporations through non-quoted shares and other equity Ø The share of assets directly held on the rest of the world and general government has regularly decreased over the last 15 years Primary allocation of HHs’ financial investment among non financial sectors (in % of total portfolio) 4

1. 2 Secondary allocation of households’ financial investments v 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 Ø Use of detailed statements of life insurance companies’ investments Ø Cross-referenced with Banque de France securities’ and issuers’ databases and with the CSDB, in order to identify the characteristics of securities Ø Iterative process to break down UCITS’ portfolio held by other UCITS Ø But some securities are left for lack of ISIN code => they are allocated to the category entitled “other investments” Ø Residual UCITS remaining after the look-through algorithm are assumed to be mainly foreign UCITS 5

1. 2. 1 Financial assets held by HHs through life insurance companies (1/2) v 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: Ø HHs’ financial investment structure remains stable over the period under review with one third of their total investment devoted to domestic sectors Ø Life insurance contracts finance mainly foreign economies Ø Non-financial corporations and financial institutions account for approximately the same proportion Ø Financing of domestic central government represents the largest share with a peak corresponding to the 2008 financial crisis. 6

1. 2. 1 Financial assets held by HHs through life insurance companies (2/2) Source : Banque de France 7

1. 2. 2 Financial assets held by HHs through UCITS (1/2) v 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: Ø Households primarily finance domestic economy through their investments in UCITS Ø The central government sector represents a tiny fraction of the households' investments Ø The share of financial investment devoted to corporations remains relatively stable around 25 % of the overall investments Ø Increasing diversification with a peak in 2009 for investments in geographical areas other than France. 8

1. 2. 2 Financial assets held by HHs through UCITS (2/2) Source : Banque de France 9

1. 3 Sectors ultimately financed by households v Sectors ultimately financed by households are derived from the analysis of the counterparts sectors in the financial accounts as a whole system: Ø Higher share of the rest of the world, at the expense of non financial corporations Ø Higher importance of households, lower share of general government debt Sectors ultimately financed by households (in % of total portfolio) 10

2. 1 Households’ investment by asset riskiness (1) v French households invest mainly in low-risk financial assets: Ø Deposits (including sight deposits, savings accounts and time deposits) Ø Money Market Fund shares Ø Life insurance contracts (excluding unit-linked contracts) v They also invest in riskier (marketable/non marketable) assets: Ø Quoted shares, debt securities, other investment fund shares Ø Non-quoted shares and other equity Households’ financial investment by asset riskiness (in % of total assets) 11

2. 1 Households’ investment by asset riskiness (3) v Focusing on the households’ low-risk portfolio, we observe that it does not show a flat pattern over the last 15 years : Ø Trend of substitution of life insurance for deposits Households' financial investment in low-risk assets (% of total assets) 12

2. 2 Geographical diversification through financial intermediaries v Diversification is mainly achieved through financial intermediaries. From the securityby-security look through approach we observe: Ø A growing diversification towards the euro area, for both investments in life insurance contracts and in UCITS Ø A geographical diversification more pronounced for life insurance contracts than for investments in UCITS. Source : Banque de France 13 Source : Banque de France

2. 2 Geographical diversification through financial intermediaries (2) v. Life insurance contracts are split between euro-denominated contracts (85 % of life insurance contracts outstanding) and unit-linked contracts (15%) Ø Euros contracts => payments are guaranteed by the insurer / unit-linked contracts => households bear risks since the value of the contracts depends on market indexes Ø 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. 14 Source : Banque de France

2. 3 Investments horizon and financial intermediaries role (1) v French households invest more in long term assets v Long term assets are considered to be riskier than short term assets Ø Explains changes in investment horizon over the period Breakdown of households’ financial assets (in %) 15

2. 3 Investments horizon and financial intermediaries role (2) v. Analysis of weighted average residual maturity for bonds held through life insurance contracts highlights some key aspects to understand what drives the trend Ø 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 Ø 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 Source : Banque de France 16

2. 4 Investment horizon and financial intermediaries role v Reallocation process from financial intermediaries to non financial sectors Ø Reallocation speed depends on economic and financial environment Ø 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 17

Directorate General Statistics Directorate Monetary & Financial Statistics Households’ investments: Financing of economy and risk analysis perspectives Thank you for your attention 18