A stable, well-functioning financial market for allA stable, well-functioning financial market for allHedge funds and private equity firms - The exposure of banks and insurance companies
Hedge funds and private equity firms have grown in significance in theSwedish financial market in recent years. They are also receiving moreattention. This particularly applies to the failure of hedge funds and spectacularcompany takeovers by private equity capital. In view of this, FI have studiedthe exposure of banks and insurance companies. We have also carried out anoutline study of the administration and risk management related to involvementin hedge funds and private equity firms. FI is following up those firms withexposures that are significant in relation to their own funds. Furthermore, FI isfollowing up indications that suggest shortcomings in the management of a fewfirms.
For the six banks the study shows that:
- They had a total exposure of approximately SEK 120 billion to hedge funds and private equity firms at the end of 2006. Their total limit for the same exposure was SEK 270 billion.
- Business with private equity firms is more important than with hedge funds. The exposure of the major banks to hedge funds is equivalent to 0.5 percent of their balance sheet totals on average. The corresponding figure for exposure to private equity firms was 0.9 percent. If one relates exposure to own funds the result is 10.0 percent for hedge funds and 18.2 percent for private equity.
- The exposure of the major banks to hedge funds and/or private equity firms poses no threat to the stability of the financial system. Lending operations, including counterparty risk in financial instruments, are much more important than direct investment. Earnings from the two business areas are considered good. There are no greater concentrations of credit risk and risk in holdings than in other activities.
- The administration and risk management carried out by the banks is satisfactory.
For the insurance companies the study shows that:
- At the end of 2006 almost 60 percent had investments in either hedge funds or private equity. A further quarter had, in line with their regulations, the opportunity to invest but had not yet done so. Companies are increasing their investments in hedge funds and private equity firms both in volume and in relative terms.
- It's more common to invest in Hedge funds than private equity firms. However, in monetary terms private equity firms are greater, SEK 21 billion compared with SEK 17 billion for hedge funds at the end of 2006.
- All in all, an extensive closure of hedge funds and/or business failures by private equity firms would not pose a threat to the companies' ability to fulfil their guaranteed obligations to pension savers and other customers. Life insurance companies and friendly societies have a greater investment than non-life insurance companies in hedge funds, as a proportion of total investment assets or in relation to their own funds. The difference between individual companies is large.
- The administration and risk management carried out by the insurance companies, such as the procedures for investment and oversight, are satisfactory.
