3/9  Yet irrespective of the different composition of the risk-diversification channels, what needs highlighting is that in the euro area the combined power of all the private risk-sharing channels is much more limited than in more stable monetary unions. Given that the role of the public sector is also virtually non-existent in Europe’s case, the outcome is that more than 56% of the effect of shocks – as opposed to 28% in the United States – is not shared. Moreover, it is important to note that during the most acute phase of the last financial crisis, the main risk-sharing channel in the euro area − the credit channel – virtually disappeared, owing to the process of renationalisation of bank loans. This was due to the climate of mistrust about banks’ financial health, and to the existence of negative feedback loops between public finances and banking solvency. To sum up, in the euro area our risk-sharing channels are weaker and, what is more, they tend to contract precisely when they are most needed. The limited strength of private risk-sharing channels in the euro area reflects both the underdevelopment of capital markets and a highly segmented banking system at the national level. There are practically no banks with a pan-European strategy, and there is little progress in cross-border lending, especially in the retail markets, or in other words, in lending to households and firms.
The five steps range from "Normal" to "Viability at Risk" and terminally, "Winding Up or Closure". Insurers assessed to be on the more critical steps will receive more stringent and intrusive supervisory actions. MAS draws the analogy between the risk classification of an insurance firm and the medical assessment of a patient's health. If an insurer is classified as being on the "Viability at Risk" step, it will probably be admitted to MAS' Intensive Care Unit. However, MAS is not regulating for a no-failure regime. We encourage industry consolidation. In today's competitive environment, size brings financial strength and facilitates diversification on both sides of the balance sheet. But it is not possible, and also not desirable, to operate on the basis that we will never, under any circumstances, allow a financial institution to fail. That way lies moral hazard. Improving corporate governance and internal controls A risk-based supervisory approach relies heavily on the strength of company leadership and management. Corporate governance is thus critical. MAS expects the Board of Directors to provide clear strategic leadership and set consistent corporate values. Management teams must operationalise these strategies while upholding the spirit of the corporate values. Given the nature of the insurance business, corporate values need to be guided by risk management concerns. What is the company's risk appetite? What should be its risk tolerance limits? What is the level of risk management skills in the company? How profitable is the underwriting of various classes of risks?