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

1Financing 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 Outline 2

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

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

1.2 Secondary allocation of households’ financial investments  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  Use of detailed statements of life insurance companies’ investments  Cross-referenced with Banque de France securities’ and issuers’ databases and with the CSDB, in order to identify the characteristics of securities  Iterative process to break down UCITS’ portfolio held by other UCITS  But some securities are left for lack of ISIN code => they are allocated to the category entitled “other investments”  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)  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:  HHs’ financial investment structure remains stable over the period under review with one third of their total investment devoted to domestic sectors  Life insurance contracts finance mainly foreign economies  Non-financial corporations and financial institutions account for approximately the same proportion  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) 7 Source : Banque de France

1.2.2 Financial assets held by HHs through UCITS (1/2)  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:  Households primarily finance domestic economy through their investments in UCITS  The central government sector represents a tiny fraction of the households' investments  The share of financial investment devoted to corporations remains relatively stable around 25 % of the overall investments  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) 9 Source : Banque de France

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

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

2.1 Households’ investment by asset riskiness (3)  Focusing on the households’ low-risk portfolio, we observe that it does not show a flat pattern over the last 15 years :  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  Diversification is mainly achieved through financial intermediaries. From the security- by-security look through approach we observe:  A growing diversification towards the euro area, for both investments in life insurance contracts and in UCITS  A geographical diversification more pronounced for life insurance contracts than for investments in UCITS. 13 Source : Banque de France

2.2 Geographical diversification through financial intermediaries (2)  Life insurance contracts are split between euro-denominated contracts (85 % of life insurance contracts outstanding) and unit-linked contracts (15%)  Euros contracts => payments are guaranteed by the insurer / unit-linked contracts => households bear risks since the value of the contracts depends on market indexes  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)  French households invest more in long term assets  Long term assets are considered to be riskier than short term assets  Explains changes in investment horizon over the period Breakdown of households’ financial assets (in %) 15

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

2.4 Investment horizon and financial intermediaries role 17  Reallocation process from financial intermediaries to non financial sectors  Reallocation speed depends on economic and financial environment  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

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