The problem with this argument is that insurers are beginning to dominate a number of these markets, notably equity release mortgages. 8  Similarly, the Solvency II capital requirement for an insurer with an internal model on a Matching Adjustment bond portfolio is based on a one-year default and downgrade stress as opposed to a one-year credit spread widening stress. The insurer is not exposed to a stress in secondary bond markets. But it is exposed to credit deterioration of borrowers. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  In at least some of these markets, it seems likely that they are now the marginal lenders and returns should therefore reflect the risks that they face. Another possibility is that the Matching Adjustment is capturing returns in excess of an appropriate risk premium. If insurers are finding niches where other types of investors face barriers to entry, they may be able to earn profitable returns. The fact that the Matching Adjustment is calculated as a residual means that it captures any factor causing the yield on an asset to be higher, not just compensation for risks to which the insurer is not exposed. If true, it is possible that the Matching Adjustment on some illiquid assets will decline over time as other investors spot the opportunities and markets become more competitive. As a prudential regulator, my primary concern is that the Matching Adjustment is being calculated correctly.
The Bank of Albania requires that you design management policies that are oriented toward profit maximization. The limitation to simple financial intermediation, such as collecting public savings and keeping them in the form of excess reserves waiting to be invested in low risk government papers, is not a characteristic of contemporary financial markets. All I mentioned above implies the indispensability for a more effective management under the conditions of enhancing the transparency. As to the structural excess liquidity, the Bank of Albania is currently targeting to keep it under appropriate levels, in order to increase the degree of the banking system reaction to Bank of Albania’s operational decisions. At the same time, we are carefully evaluating necessary refinements to monetary policy instruments, to further promote the trading in the interbank money market. Beyond the structural liquidity position, another important issue is the existence of limits that certain banks apply in lending relations with one-another. From a pure academic viewpoint, it is quite easy to label these limits as an effort to ensure an oligopolystic structure in the market. I do not like to prejudice the prudent stance and measures reflected in these limits. However, I should state that in your business with non-bank clients, there may be identified elements, to which you take a higher degree of risk than the one materialized in interbank money transactions.