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Product Intervention as a Macroprudential Tool: the Case of Catastrophe Bonds

Research output: Contribution to journalArticle

Anat Keller, Miriam Goldby

Original languageEnglish
Pages (from-to)1-64
JournalGeorge Washington International Law Review
Issue number1
Early online dateFeb 2019
Accepted/In press29 Aug 2018
E-pub ahead of printFeb 2019
PublishedFeb 2019



King's Authors


One effect of the financial crisis of 2007-2009 was to jump-start a
focus on macroprudential supervision, a supervisory approach which
adopts a bird’s-eye view in assessing and addressing systemic threats to
financial stability. In addition to the threats to the financial system
posed by the financial reach and exposure of large systemically relevant
corporations, threats can also come from broader financial activity such
as the design and distribution of innovative financial products within
financial markets. Thus, product intervention powers may be useful in
the future to financial supervisors attempting to address systemic risk
deriving from financial innovation and growth. The utility of product
intervention can be demonstrated by using the catastrophe bond markets
as a case study.
Extreme climate-related events are increasing in magnitude and frequency as a result of climate change and consequent losses are likewise
increasing. The need to transfer these risks is leading to a growth in
demand for insurance and the demand is beginning to exceed the capacity of traditional insurance and reinsurance. This has led to a type of
beneficial financial innovation—the creation of instruments which
transfer these catastrophe risks to the capital markets. The prevalence of
catastrophe bonds in the financial markets is therefore growing, with the
number of issues increasing steadily year-on-year. On the back of this, a
number of catastrophe-linked derivatives are beginning to be traded in
the markets. This Article argues that a number of features of the design
and distribution of these financial instruments may render them systemically relevant in the future. This is so particularly in view of the potential for significant common exposures to develop, which, should widespread and significant losses occur, may engender panic in the
financial markets. It also argues that the right way to address these
systemic risks may be through the exercise of product intervention powers
rather than by other regulatory means. Accordingly, this Article assesses
the extent to which such powers, derived from the laws of the United
Kingdom and the European Union, can be exercised for the achievement
of macroprudential goals. More broadly, it analyzes what lessons can be
learned from this case study about product intervention as a
macroprudential tool to prevent or mitigate the build-up of systemic risk
to financial stability.

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