You are here: Home Knowledge Base Economy Tackling Systemic Financial Risk
Symposium 2008

Tackling Systemic Financial Risk

The Challenge

Financial globalization helps individual market participants diversify risk, but need not stabilize the international financial system as a whole. Given increasingly complex financial innovations and interrelated markets, a shock in one particular market segment may trigger serious contagion in other segments.

Recently, the U.S. housing market decline and the subprime meltdown led to a proliferation of financial risks in other financial markets and sectors worldwide. What policies are required to deal with the problem that the diversification of credit risk reduces the incentive of creditors to scrutinize borrowers? Is it sufficient to rely on voluntary codes of conduct by hedge funds, or should they be regulated either directly or indirectly?

Which kind of regulatory and supervisory approaches (rules versus discretion) are most promising? What are the appropriate strategies for fighting a major financial cross-border crisis effectively, once crisis prevention has failed or reached its limits?

    Proposals

    Proposal
    Symposium 2008

    GES Summary - Lessons of the Financial Crisis

    The recent financial crisis is a complex event, but some of its lessons are simple. This summary of the lessons as I see them draws on my “Thoughts on the Subprime Crisis” (see the background read ...

    The recent financial crisis is a complex event, but some of its lessons are simple. This summary of the lessons as I see them draws on my “Thoughts on the Subprime Crisis” (see the background readings). First, there is no optimal financial system. Both bank- and market-based systems have flaws; so do the hybrid systems entailing major roles for both banks and securities markets, which are in fact the kind of systems that we observe in advanced economies. Whatever the structure of the financial system, the crisis problem will still be with us. Second, the need now is not for

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2008

    Tackling Systemic Financial Risk

    1. Transparency and AccountabilityObservation:Financial Reporting to shareholders and risk reporting to regulators and senior management has failed. All efforts through IFRS, US GAAP and Basle II have ...

    1. Transparency and AccountabilityObservation:Financial Reporting to shareholders and risk reporting to regulators and senior management has failed. All efforts through IFRS, US GAAP and Basle II have not prevented failures in risk evaluation by banks and regulators in the 3rd quarter 2007 nor have they been able to create transparency about the remaining risk position from the sub prime crisis with shareholders and clients. Hedge funds and private equity companies have developed a parallel banking segment which still has no transparency at all.Issues to Tackle: greater transparency in external reporting on securities and derivative positions consolidated and unconsolidated. improvement of internal

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2008

    Tackling Systemic Financial Risk

      1. Financial crisis will not go away. Our capitalist market system is bound to produce occasional excesses. If anything, liberalized and globalized financial markets tend to amplify such swings. In ...

      1. Financial crisis will not go away. Our capitalist market system is bound to produce occasional excesses. If anything, liberalized and globalized financial markets tend to amplify such swings. Indeed the frequency of financial crisis in the last few decades testifies to such observation. 2. It is important to recognize that a system-wide financial distress, involving a large number of undercapitalized and insolvent firms, is usually the consequence of credit boom gone sour. The role of credit is critical both as the “financial accelerator” and as the source of systemic crisis. If credit expansion is somehow kept moderate during

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2008

    Tackling Systemic Financial Risk

    The current ongoing financial crisis originates from a combination of factors.  Two of them are particularly important: 1) a prolonged period of low world interest rates, and 2) financial innovation ...

    The current ongoing financial crisis originates from a combination of factors.  Two of them are particularly important: 1) a prolonged period of low world interest rates, and 2) financial innovation mostly associated with the US sub-prime mortgage market (e.g., CDOs, CLOs, securitization and tranching, SIVs).  Regulatory arbitrage appears to have been a main motivation behind financial innovation: by allowing financial institutions to move assets out of their balance sheets, it reduced the required capital. However, a first problem is that risk exposure was not eliminated, as financial institutions remained implicitely committed to providing liquidity assistance to matuirity-mismatched SIVs, which funded themselves with

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2008

    What does “systemic” financial regulation mean?

    What does “systemic” financial regulation mean? John Eatwell and Avinash Persaud A peculiar characteristic of financial regulation today and one of the causes of its failure has been the divergenc ...

    What does “systemic” financial regulation mean? John Eatwell and Avinash Persaud A peculiar characteristic of financial regulation today and one of the causes of its failure has been the divergence of economic theory and practice. Recent proposals by regulatory and banking lobbies appear to be continuing this divergence. In theory it is generally accepted that the core purpose of financial regulation is to mitigate systemic risks, like a global credit crunch. Such risks are externalities. Their cost to the economy as a whole is greater than the cost to firm whose actions are creating the risk. However, in practice, the

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2008

    A party pooper's guide to financial stability

    A party pooper's guide to financial stability By Charles Goodhart and Avinash Persaud Published: FT. June 5 2008 03:00 | Last updated: June 5 2008 03:00 Few will envy Lord Turner's new position as ch ...

    A party pooper's guide to financial stability By Charles Goodhart and Avinash Persaud Published: FT. June 5 2008 03:00 | Last updated: June 5 2008 03:00 Few will envy Lord Turner's new position as chairman of the UK's Financial Services Authority. Almost 12 months on from the start of the credit crunch and eight months since the run on the Northern Rock bank, there is a developing consensus on what is to be done to make the financial system less vulnerable to crisis. The bad news is that it is largely the same consensus we reach after every

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2008

    Tackling Systemic Financial Risk

    Financial globalization helps individual market participants diversify risk, but need not stabilize the international financial system as a whole. Given increasingly complex financial innovations and ...

    Financial globalization helps individual market participants diversify risk, but need not stabilize the international financial system as a whole. Given increasingly complex financial innovations and interrelated markets, a shock in one particular market segment may trigger serious contagion in other segments. Recently, the U.S. housing market decline and the subprime meltdown led to a proliferation of financial risks in other financial markets and sectors worldwide. What policies are required to deal with the problem that the diversification of credit risk reduces the incentive of creditors to scrutinize borrowers? Is it sufficient to rely on voluntary codes of conduct by hedge

    Polity, Academia, Business, Civil Society