Meeting the PRA’s expectations on the PPP has required some firms to take action to substantially reduce exposures to single asset classes or to different asset classes with similar underlying risk drivers. But, as I have explained, we are seeing new types of concentration risks emerging. These raise questions about the strengths and weaknesses in insurers’ investment strategies, governance and risk management. So we will continue to look for evidence that firms are adequately integrating the PPP across these areas in a way that goes beyond just quantitative techniques: i.e. that qualitative considerations are taken into account too. Faced with uncertainty, a prudent person would not be expected to simply rely on quantitative analysis when there are risks that are not, or cannot, be modelled. In addition to engaging with firms on the PPP as part of our core supervision  Page 8  activity, insurers’ assessment of counterparty exposures will also be reviewed in our Life Insurance Stress Test exercise this year. We will look at firms’ reliance on reinsurance following stress, and the extent to which this concentration risk exists. I would emphasise that while we expect greater consistency in the efforts and thought that firms put into meeting the PPP, we do not expect to see the same outputs. It is clear from working with firms that there is no universally right or wrong number for investment limits.
4  BIS central bankers’ speeches  Chart 4 Rising dislocations across credit and fixed income markets Basis points  Basis points  10 0 -10 -20 -30 -40 -50 -60 -70 -80 -90  5 0 -5 -10 -15  Jan.16  Nov.15  Sep.15  Jul.15  May.15  Mar.15  Jan.15  -20  Nov.14  Sep.14  Jul.14  May.14  Jan.14  Mar.14  30yr swap spread CDS-cash basis IG skew (rhs)  Source: Barclays Live and Bank calculations. IG skew refers to the difference between US CDX.IG index and single-name CDS (SNCDS), 10-year swap spread is the spread between 10-yr USD swap and 10yr US treasury note, and CDS-cash basis is the spread between SNCDS and a basket of equivalent cash bonds. Chart 5 Bank equities down 25% since end 2015 UK  US  Euro area  Japan  105 100 95  85 80 75  (Dec 2015 = 100)  90  70 65 01  December 2015  17  04  January 2016  20  05  February  23  Source: Thomson Reuters Datastream and Bank Calculations. BIS central bankers’ speeches  5  Chart 6 UK banks’ ROE down 11pp since 2006(a) Per cent 30 25 20 15 10 5 0  Pre-tax  -5  Post-tax  -10  -15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 H1 Sources: Published accounts and Bank calculations.