Docstoc

Understanding the dynamics of systemic risks

Document Sample
Understanding the dynamics of systemic risks Powered By Docstoc
					   Understanding the
dynamics of systemic risk


          MENA-OECD
   Capital Markets Task Force
      6th December 2010
   By: Jean-François Lepetit

                                1
         SYSTEMIC CRISIS
• A definition
  A disruption to the flows of financial services
    Caused by an impairment of all or part of the
     financial system
    Having widespread consequences on the real
     economy
• Systemic risk ; a threat of a systemic crisis



                                                     2
 Systemic market participants

• Necessary and insufficient conditions
   Size : yes, but…
  Interconnection : yes, but…
  Lack of substitutability : yes, but
  No single criteria



                                          3
 Systemic market participants
• No specific category of systemic institutions
   –   Banks
   –   Insurance companies
   –   Money market funds
   –   Investment vehicles, hedge funds
   –   Monolines
   –   Mortgage companies : Fannie Mae…
• Identification : not what they are, but the risk
  they take : systemic activities

                                                     4
  Identification of systemic activities

• Risky activities are priced by markets
  – Efficient markets balance risk/return
• If return  risk
  – Incentive for market participants to
    accumulate risks
  – An activity with an excess return can
    become a systemic activity


                                            5
  Activities with excess return
• Oligopolistic activities of investment banks
• Activities incorrectly priced : excess return
   – Underestimation of market and counterparty risks :
     models and VAR
   – Business models of investment banks :
     assumption of liquid markets
   – Regulatory arbitrage :
      • commercial banking and securitization;
      • banking book versus trading book;
      • the shadow banking system


                                                      6
  Prevention of systemic risk
• Micro supervision insufficient
  – limited to regulated firms : banks,
    insurance Cies
  – No global vision of market evolution
  – Vulnerable to regulatory arbitrage
• So far new regulation limited to banks
  – Bale 3, Dodd-Frank
  – Shadow banking system issues not directly
    addressed
                                            7
  Prevention of systemic risk
• Macro supervision of financial markets
  – Macroeconomics ( monetary policies etc.)
  – Identification of systemic activities
  – Collection of information on OTC markets
    and shadow banking system
  – Supervision of evolution of macro financial
    markets issues


                                                  8
 Prevention of systemic risks
• Direct action of regulators
  – When systemic activities are identified
  – Whatever the market participant’s category
    and business
  – With appropriate regulatory and legal
    means
• Taxation of systemic activities
  – Across al market participants
  – To avoid regulatory arbitrage
                                             9

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:10/13/2012
language:English
pages:9