Technical Capabilities Necessary for Regulation of Systemic Financial Risk Summary of a Workshop (2010) / Chapter Skim
Currently Skimming:
2 Major Themes of the Workshop Discussions
2 Major Themes of the Workshop Discussions
Pages 4-13
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 4... ...
Need for a Common Language for All Securities and Financial Contracts An important building block for systemic financial risk regulation is the development of a common nomenclature and language to enable the unambiguous aggregation and interpretation of data collected from firms by regulators. Virtually all data on complex financial instruments and risk measurements (and many other data)
|
From page 5... ...
Data Needed for the Regulation of Systemic Financial Risk Many workshop participants stated that neither the regulatory system nor individual firms currently have adequate data to monitor and regulate systemic financial risk. For example, when the market for mortgage-backed securities ran into trouble in 2007, it would have been helpful to know different firms' exposures to this asset class.
|
From page 6... ...
Workshop participants raised a number of issues that would have to be addressed in order to make these data more readily useful for guiding systemic risk regulation: • The quality of the data would have to be examined and possibly improved, • The existing level of granularity of the data might not be well suited to systemic financial risk regulation, and • Protections, some mandated by Congress, would have to be reconsidered. Most workshop participants who commented about existing data sources did not view them as a panacea, and participants expressed caution about making them more widely available.
|
From page 7... ...
The purpose of these three prongs is to enable the systemic risk regulator to react to the next crisis or, ideally, to anticipate it. Some Signals That a Systemic Regulator Might Monitor In various remarks, workshop participants suggested that a systemic financial risk regulator might monitor risk concentrations, profits, unusual escalations in asset prices, and other indicators as signals of potential instabilities.
|
From page 8... ...
Indeed, Schachter noted that there can be real systemic risk even if individual financial institutions are doing an ideal job of controlling their firm-level risks. Since systemic risk arises from a complex and multilayered set of relationships -- for example, counterparty risk exists in a cascade of relationships -- it is an understanding of the relationships (and their dynamic properties)
|
From page 9... ...
Of course, attaining this level of understanding involves modeling as well as data. The stress tests applied in the spring of 2009 to the largest banks rested on relatively simple models of risk based on the behavior of financial measures computed from currently available data and without the interconnectivities proposed in the workshop.
|
From page 10... ...
During times of liquidity failure, in particular, the ability to perform stress tests quickly and quietly could be very valuable. Privacy and Other Issues That Limit the Regulatory Use of Data Already Collected The workshop discussion suggested that systemic risk regulation requires more comprehensive access to data at a detailed level than is currently available to any single regulator.
|
From page 11... ...
The transparency provided by making some data available to all can be a powerful tool to improve the market's ability to price risks that can contribute to systemic risk, such as counterparty risk. Price transparency generally improves market efficiency and liquidity, but position transparency might reduce returns from proprietary research and thus be resisted even if it does provide risk information.
|
From page 12... ...
Incorporating an Understanding of Human Behavior into Systemic Risk Regulation One workshop participant noted that systemic risk is not driven solely by financial engineering; behavior, auditing rules, and governance also play important roles. Therefore, models to inform systemic financial risk regulation need at least to simulate processes of individual behavior and feedback arising from individual behavior.
|
From page 13... ...
Such knowledge might also, for instance, inform the understanding of when traditional, stylized forms of risk management should be overruled by other, more dominant considerations such as sudden and contagious shifts of public mood. Several workshop participants said that such shifts of mood had contributed to the run-up to the current crisis.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.