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Theorie Und Praxis ITAS



Morita, K.; Nagai, Y., 2011: Japan Economic Focus,        Systemic Risk in Global Finance
Economic Implications of Earthquake. In: Barclays
Capital, Japan Economic Research, March 15, 2011
                                                          by Helmut Willke, Zeppelin University
Muramatsu, N.; Akiyama, H., 2011: Japan: Super-Ag-
ing Society Preparing for the Future. In: The Geron-
tologist 51/4 (2011), pp. 425–432                         The paper addresses the emergence of sys-
Okada, S.; Takai, N., 2004: Damage Index Function         temic risk as a property of global finance. Part
of Wooden Buildings for Seismic Risk Management.          1 describes two factors of the post-Bretton-
In: Journal of Structural Engineering 582 (2004), pp.     Woods global financial system which John
31–38                                                     Eatwell has singled out as pushing the pro-
                                                          pensity for systemic risk: the focus on single
Porto, M.F.; de Freitas, C.M., 2003: Vulnerability
                                                          firms, and a misguided focus on homogene-
and Industrial Hazards in Industrializing Countries:
                                                          ity. Part 2 of the paper then broadens the per-
An Integrative Approach. In: Futures 35/7 (2003), pp.
                                                          spective in order to expose some aspects of
                                                          a political economy of systemic risk in global
Porto, M.F.; Fernandes, L., 2006: Understanding           finance. Now, after the fact of a global crisis,
Risks in Socially Vulnerable Contexts: The Case of        the major controversy is about the nature of
Waste Burning in Cement Kilns in Brazil. In: Safety       systemic risk: is it mainly an economic prob-
Science 44/3 (2006), pp. 241–257                          lem, or is it a political issue, that is, must it be
Stedman, L., 2011: Japan: Country Suffers Water           understood in terms of political accountabil-
Shortages Following Earthquake and Tsunami. In:           ity and the limits of political regulation? Part
Water21 – Magazine of the International Water As-         3 discusses some consequences for regula-
sociation (IWA);       tion and supervision within the context of ir-
cfm?name=news679 (download 15.3.11)                       reducible conflicts between national egoism
Taleb, N.N., 2007: The Black Swan: The Impact of the      and global collective goods.
Highly Improbable. London
Tanaka. T.; Kazui, H.; Sadik, G. et al., 2009: Preven-
tion of Psychiatric Illness in the Elderly. In: Psycho-   1 Introduction
geriatrics 9 (2009), pp. 111–115
                                                          The veil of ignorance covering the operational
Tokyo Metropolitan Government, 1985: Report on
                                                          modes and the consequences of arcane finan-
Earthquake Damage Estimation in the Ward Districts
of Tokyo. Disaster Prevention Council Report. Tokyo       cial models and instruments becomes a public
                                                          concern as soon as the failure (bankruptcy) of
Vervaeck, A.; Daniell, J.E., 2011: Tohoku Earthquake
Articles on Many updates           financial institutions (banks, investment firms,
from 11/03/2011 to 28/09/2011                             insurance companies, private equity funds, semi-
Zsidisin, G.A.; Ragatz, G.L.; Melnyk, S.A., 2005: The     official mortgage agencies like Fannie Mae or
Dark Side of Supply Chain Management. In: Supply          Freddie Mac) threaten to engender system-wide
Chain Management Review 16 (2005), pp. 46–52              consequences. The question is: what are system-
                                                          wide consequences?
Contact                                                        Systemic repercussions of the (possible) fail-
                                                          ure of financial corporations are closely related to
Dr. Bijan Khazai                                          the notion of “systemic risk”. In general, systemic
Karlsruhe Institute of Technology (KIT)
                                                          risks emanate from an intransparent interplay of
Geophysical Institute (GPI)
Hertzstraße 16, 76187 Karlsruhe                           layered and leveraged components of a concate-
Phone: +49 (0) 7 21 / 6 08 - 4 46 24                      nated compound. The case of the global financial
Email:                               system is an exemplary one, since the focus of
                                                          all governance and regulatory action has been on
                                                          single components, i.e., issuers, Chief Financial
                        «»                                Officers, individual firms and corporations etc.,
                                                          whereas the interplay of these components has
                                                          remained intransparent: “A lack of focus on the
                                                          changing system characteristics of the interna-

Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011                         Seite 33

tional financial system has become a character-          and persons. By 2003, the sources of risks had
istic of international regulatory developments in        shifted to complex financial instruments and ad-
the past few years” (Eatwell 2004, p. 1).                verse macroeconomic conditions for the business
      John Eatwell has given an exemplary ac-            strategies of financial institutions. At present, the
count of two of the most acute factors of com-           systemic effects of individual risk-taking are
mon concepts of regulation that actually create          becoming more accentuated, because the tradi-
and enhance systemic risks. The factors he sin-          tional separation of different types of financial
gles out are (1) the focus on single firms instead       institutions, in particular, the separation between
of a focus on a conglomerated global system of           banks, insurance companies, securities and funds
finance, and (2) a misguided focus on homoge-            (already loosened for the USA by the Gramm-
neity instead of a focus on heterogeneity as an          Leach-Bliley Act of 1999), is undermined by an
optimal mix of risk factors.                             intransparent concatenation of risk propensities
                                                         via diffusing effects of structured credit instru-
                                                         ments (Plender 2005). The creation of a mas-
2 Systemic Risk, Systemic Relevance and
                                                         sive “shadow banking system” is intended to
  Systemic Intransparency
                                                         hide major transactions, to enhance intranspar-
2.1   Non-knowledge and Intransparency                   ency and to cover critical aspects of the financial
                                                         system under a veil of ignorance by operating
In principle, regulation and supervision of the fi-      outside of regular banking supervision and na-
nancial system through central banks, regulatory         tional regulation. The shadow banking system
and supervisory institutions aim at system-wide          “is a nexus of private equity and hedge funds,
financial stability. In practice, however, critical      money-market funds and auction-rate securities,
standards and rules, i.e., the Sarbanes-Oxley Act        non-banks such as GE Capital and new securities
or pillar one of Basel II, address single firms and      such as CDOs and credit-default swaps. […] On
their specific control architectures and risk mod-       the eve of the crash, more capital was flowing
els. To be sure, Basel II is an important step in        through it than through the conventional banks”
establishing a learning mode of the new super-           (Economist 2009, p. 20).1
visory review process, aiming at a cognitive su-               As the field of options within the financial
pervisory regime in banking. Still, the focus is on      system is extended into the depth of structured
single firms and their risk behaviour, neglecting        derivative instruments and into the labyrinths
structural issues and negative externalities of the      of prolonged chains of conditioned events, the
risk strategies of single firms. New types of op-        chances and risks of aggregate or even systemic
erational risks emanating from individual firms          effects of mutual reinforcement, snowballing,
might coalesce to systemic operational risks and         leverage and positive feedback loops beyond
market risks that overwhelm the coping capaci-           single firms loom large. A complex array of op-
ties of the individual actors in the financial sys-      tions corresponds to chances of “low-probability,
tem: “The internal risk management regime – for          high-impact events” (Kohn 2004). A regulatory
credit and market risk, operational risk, compli-        focus on single firms necessarily makes govern-
ance risk – needs to meet a more exacting stand-         ance blind for systemic turbulences. These turbu-
ard. The requirements for operational resilience         lences certainly start with some actions and deci-
for technology systems are necessarily more de-          sions of firms, like children throwing snow-balls,
manding” (Geithner 2004, p. 4). Obviously, this          but these actions then turn into avalanches by
also increases the demands on and difficulties of        setting off chain reactions that follow the logic
financial governance in managing systemic risk.          of the financial system, and defy the motives and
     The shifting grounds for regulatory super-          reasons of the people or single firms involved.
vision correspond to a marked change in risk                   When the bubble bursts and the crisis breaks
perception within global finance during the last         out, systemic risks turn into systemically-relevant
decade. In the 1990s, major risks derived from           threats. Again, nobody can know for sure exactly
aberrant or criminal behaviour of single firms           what event und exactly what organization/institu-

Seite 34                        Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011

tion is systemically relevant. The notion covers         ties of distributed knowledge into a construction
various aspects: (1) an organization is “too big         of operating market: “The knowledge of the cir-
to fail”, meaning that its failure precipitates the      cumstances of which we must make use never
downfall of an entire sector of the financial sys-       exists in concentrated or integrated form, but
tem; (2) an organization’s failure would kick off        solely as the dispersed bits of incomplete and fre-
an avalanche of related failures within the financial    quently contradictory knowledge which all the
system, particularly by destroying the quintessen-       separate individuals possess” (Hayek 1945, p.
tial trust which fuels financial transactions; (3) the   519). Even more so, then, the financial markets
failure of a sector of the financial system would        rely on a trans-individual aggregation of knowl-
expand into the “real” economy, putting firms and        edge and non-knowledge (uncertainties, risks,
jobs at risk, thus impinging on the social security      and ignorance) that no single person or institu-
system and connecting to politically touchy fields;      tion is in a position to direct or avoid.
and (4) an organization’s failure would touch off
social unrest, protest and more violent expressions
                                                         2.2    Uniformity and Homogeneity in
of deception and insecurity by people affected,
                                                                Financial Markets
again connecting to politically touchy arenas.
       The notion of “systemic relevance” implies        A second form of systemic risk points up the
a responsibility for politics to react to a critical     idiosyncratic logic of the financial system even
state of financial (or economic) affairs. Its defi-      more clearly. Whereas financial innovations and
nition derives less from financial/economic rea-         a more elaborate temporal deep structure of fi-
soning than from political judgments of political        nancial transactions enhance the field of options
relevance. Politics finds itself in a double bind of     in the financial system, a complementary dynam-
unavoidable non-knowledge and intransparency:            ics can reduce that field of options to a danger-
political decision-makers have no way of know-           ous level of uniformity. John Eatwell calls this
ing the exact financial/economic implication of a        result a state of homogeneity, as opposed to the
critical situation, since even most of the financial     crucial heterogeneity which allows markets to
and economic actors involved have no clue to             prosper: “Markets become illiquid when objec-
what is going on; and they have no way of know-          tives become homogeneous. When everyone be-
ing whether or not political action (like bailout,       lieves that everyone will sell, liquidity vanishes.
guarantees, grants, the creation of “bad banks”,         Markets fall over the cliff when average opinion
or even nationalization of firms, etc.) will solve       believes that average opinion has lost confidence
the problem, or whether the solution will be the         in financial assets” (Eatwell 2004, p. 3). What
next problem.                                            aspects of capital, as a symbolic medium, drive
       An important aspect of the financial sys-         financial markets towards homogeneity, instead
tem’s logic lies in the temporal deep structure of       of preserving a more balanced heterogeneity of
capital. Since “financial markets are markets for        diverse objectives, methodologies, instruments,
stocks of current and future assets, the value of        risk models or time horizons?
which today is dependent on the expectations of                Surprisingly, the culprits seem to be exactly
their future value” (Eatwell 2004, p. 2), present        those aspects of capital that are responsible for a
expectations of future asset-price movements             global financial system coming into being in the
and future value dynamics must be based on               first place: liberalization, disintermediation, in-
past experience as well as on concurrent beliefs,        ternationalization, global standards and methods
assumptions, reasoning and extrapolations of             of professionalization “and extensive conglom-
distributed knowledge. No person or institution          eration of financial institutions” (Eatwell 2004,
commands the knowledge or covers the expertise           p. 4). These factors combine to create a unified
to “run the system”. The system runs itself. Frie-       and uniform space of global finance, character-
drich von Hayek has shown this convincingly for          ized by global infrastructures, global suprastruc-
the “simple” regular market, stressing that only         tures (i.e., uniform methods, standards, and
the market itself is able to combine the complexi-       models of regulation and supervision), aligned

Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011                       Seite 35

core business processes and financial products,          phones, ship building, etc. The hog cycle builds
similar business visions, strategy maps, and core        on investors’ exaggerated expectations in times
competencies, coordinated rule systems, risk             of shortages, and results in over-capacities be-
management procedures, and control ideas.                cause “everybody does the same thing” (homo-
      At first glance, these factors seem innocent       geneity) instead of everyone doing their own
enough, since they contribute to establishing ex-        thing (heterogeneity). The metaphor of “cycle”
actly what is at stake – a global financial system.      is meaningful in this context, since systemic risk
The unintended consequences of their perform-            is, to a considerable degree, a consequence of
ance, however, seem to be detrimental to the sta-        unexpected and unintended cyclical behaviour
bility and success of the very system they consti-       of concatenated financial processes – and a cor-
tute. This basic ambivalence or built-in contra-         responding inability of political regulation to
diction is, of course, reminiscent of Marx’ char-        prevent pro-cyclical, self-reinforcing dynamic
acterization of the capitalist system as inherently      processes – hence the focus of the Basel Com-
self-destructive. Ironically, Marx’ diagnosis was        mittee on Banking Supervision (BCBS) (and
premature in presupposing circumstances of the           other institutions) on instruments and measures
deterritorialized deployment of capital that only        to initiate “counter-cyclical” effects within ongo-
the ultimate global breakthrough of the capital-         ing financial dynamics (Elliott 2011).
ist mode of financial operations have brought                  On a third level, the level of the financial
into existence – a constellation which Marx may          system, the long-term cyclicity of the real econ-
have foreseen by following the logic of the me-          omy is replaced and enhanced by the short-term
dium of capital.                                         and ultra-short-term cyclicity of electronic finan-
      The astonishingly self-defeating propensity        cial flows. It takes considerable experience and
of the financial system is closely related to its        expertise for people to direct their interventions
temporal deep structure. In order to understand          in a way that avoids unintended or detrimental
this, it seems helpful to distinguish among three        consequences. It is important to recognize (and
levels. The market economy as a functional sub-          it takes a bit of courage to admit) “that we do
system of society fosters heterogeneity because          not know a lot about the underlying dynamics of
the power of competition drives differentiation,         financial crises in the context of the evolving fi-
specialization, a Schumpeterian propensity for           nancial system” (Geithner 2004, p. 4).
innovations and a Porterian exploitation of the
differential competitive advantages of locations         3 Towards a Political-economical Approach
(Porter 1990). Hence, on a first level in a “sim-          to Systemic Risk in Global Finance
ple” market economy, there is little danger of
forced homogeneity.                                      Systemic risk undermines political legitimacy,
      However, the trouble with “herd behaviour”         because it forces national polities to step in with
and the corresponding urge towards homogene-             public money to save systemically-important in-
ity begins on a second level, when the decisions         stitutions which are “too big to fail” –, meaning
to invest and the decisions to sell/buy are distant      that their failure would do even more damage to
points in time and therefore lose their automat-         public goods (Goldstein, Véron 2011). Indeed,
ically-corrective response from the market. The          banks have actively merged in order to cross the
famous “hog cycle” points to the problem of              threshold to become “systemically important”
maintaining heterogeneity when extended time             (Brewer, Jagtiani 2009), and to enjoy the advan-
frames (i.e., investing in livestock, raising hogs,      tage of being “too big to fail” (TBTF) (Baker,
producing meat and selling the product) and              McArthur 2009). Actually, political systems are
committed resources prevent a fast and flexible          being taken hostage by huge banks and other fi-
reaction to market conditions. Hog cycles still          nancial institutions, creating pervasive problems
exist today, causing serious problems of excess          of moral hazard and misguided incentives (Rajan
production capacity in many fields: the automo-          2010, p. 170). “Government policy toward TBTF
tive industry, memory chips, computers, mobile           firms, which has frequently resulted in privatiza-

Seite 36                        Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011

tion of gains and socialization of losses – when               In addition, it has evolved from a loosely-
combined with executive compensation at TBTF             coupled system, separated by national borders and
firms that bears little relation to relative per-        jurisdictions and by separate business models for
formance – has also lowered public trust in the          different types of financial institutions, into a tight-
‘fairness’ of the financial and economic system”         ly-coupled system, concatenated by “structured”
(Goldstein 2011, p. 10). The goal of multi-level         financial products, cascaded firm and fund struc-
policy responses to system risk must be to avoid         tures, globally interrelated financial conglomer-
the forced choice between massive public bail-           ates and homogeneous business models across the
outs and market chaos (Levitin 2011).                    board. Appropriately, Amar Bhidé has called the
      The challenge, then, is to cope with uncer-        global banking crisis “an accident waiting to hap-
tainty and ignorance in governing complex sys-           pen” (Bhidé 2009). The Second Warwick Com-
tems. For most global institutions, this is daily        mission has, for these reasons, argued in favour of
business, and they would not even think about            a “praise of unlevel playing fields” (The Warwick
solid truths and immovable expectations as               2010). And Raghuram Rajan calls the homogene-
guidelines for their operations. Some agents of          ity of concepts “cognitive capture” of most of the
global governance, i.e., the WHO, the IMF or             actors involved (Rajan 2010, p. 181).
the IRC are quite proficient in handling risks and             To clarify the notion of systemic risk in
coping with uncertainty as inevitable aspects of         global finance, it is helpful to assume three core
their world. From the vantage point of global po-        system’s features of global finance which invite
litical economy, the disturbing part of the knowl-       systemic risk: (1) global concatenation, (2) con-
edge paradox is not an inability or unwillingness        tagion, and (3) tight coupling.
of global actors to confront and manage uncer-                 (1) In practical terms, the global financial
tainty. It rather concerns a deficient appreciation      system has achieved nearly total concatenation
of the levels and consequences of ignorance and          after the demise of the Bretton-Woods limita-
uncertainty. There is an abundance of knowl-             tions, and after the recall in 1999 of the Glass-
edge about non-knowledge and pertinent coping            Steagall Act, which was enacted in 1933, explic-
strategies for uncertainty at the level of persons.      itly to separate the business spheres of banks,
In stark contrast, analysis and practice are just        investment firms and insurance companies, in or-
beginning to look at the same phenomena at the           der to create more transparency in various types
level of social systems. Collective intelligence         of financial businesses. During the 1990s, and, in
and systemic risks are just emerging as serious          particular, in the period from 2000 to 2007, every
topics of governance theory and practice (Eat-           financial institution was connected to many other
well 2004; Krahnen, Wilde 2006).                         institutions via a variety of financial instruments,
      The financial crisis can be seen as a “nor-        which included opaque risks. The situation was
mal accident” in Charles Perrow’s sense (Perrow          aggravated by the gradual emergence of a vast
1984), that is, a temporary breakdown of a com-          shadow banking system which evaded all official
plex high-risk system. To be sure, the ramifica-         frameworks of regulation and control.
tions of this special case of “accident” are be-               Gradually, global finance has been trans-
yond most people’s imagination, the costs are as-        formed into a thoroughly concatenated and inter-
tronomical, and will extend well into future gen-        connected system with complex interaction of its
erations. But, in essence, the operational logic of      parts. It is characterized by strong correlations and
this system failure appears to be similar to other       interdependencies between the components of the
catastrophes in other complex, tightly-coupled           system, a vanishing of borders and limitations, a
socio/technical systems. The global financial            re-emergence of general-purpose financial institu-
system is even more complex, since it comprises          tions, an emergence of financial institutions held
an array of high-tech infrastructural and opera-         to be “too big to fail”, an increasing influence of
tional systems including sophisticated software          overall actors like rating agencies and global fi-
on the one hand, and complex social interactions         nancial players, an emergence of a shadow bank-
and relations on the other.                              ing system which reinforces interrelations and

Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011                           Seite 37

stacked dependencies, a growing homogeneity              types of financial firms, like banks and insuranc-
of basic economic assumptions as represented by          es: “Diversifying risk through hedging increases
the “Washington consensus” (Williamson 1990),            linkages among market participants, which, at
a striking uniformity of business models and risk        least in part, could offset the risk-spreading and
strategies, leading most actors and firms to look        foster systemic risk” (Schwarcz 2008, p. 221).
in the same direction and to disregard the same                Whereas the details of setting up adequate
risks. “Large and complex financial conglomer-           firewalls must be left to financial experts, for po-
ates now have hundreds – and sometimes thou-             litical economy and governance theory, the prob-
sands – of majority-owned subsidiaries, with a           lem of implementing the principle of subsidiarity
high percentage of those subsidiaries located in         relates to the architecture of global finance – that
foreign locations” (Goldstein 2011, p. 10).              is, the need to change from a tightly- to a loosely-
      (2) Contagion is a feature of a tightly-con-       coupled system. A crucial case in point is secu-
nected (global) financial system. An interna-            ritization in general and mortgage securitization
tionally- or even globally-diversified portfolio         in particular.
makes sense if investors want to protect them-                 As soon as securitization creates special-
selves against specific-country risks. If, however,      purpose vehicles (SPVs), structured investment
a crisis looms, then the connections and relations       vehicles (SIVs), or special purpose enterprises
used to diversify may backfire, and produce un-          (SPEs) for these vehicles from an underly-
anticipated shocks. Crisis contagion happens             ing pool of mortgages (or mortgages combined
when a faltering economy or a financial crisis           with other debts), the quality of financial busi-
in one country spreads to an otherwise healthy           ness changes from regular banking to leveraged
economy or financial system of another country.          investing: “The key to securitization is that the
Contagion is aggravated by “rational” herding            SPV finances its purchases of cash flows from
behavior of international investors and by ho-           mortgages by issuing securities, which are then
mogeneous concepts, investing and disinvesting           called residential mortgage backed securities
strategies, which lead to massive cumulative ef-         (RBMS) or commercial mortgage backed secu-
fects (Krugman 2009, p. 93). Even the highly-            rities (CMBS) because they are backed by the
sophisticated and sensible rules of Basel II have        payments by the holders of the mortgages in the
proven to work in a pro-cyclical manner during           SPV portfolio” (Sinn 2009, p. 63). A change in
the recent financial crisis, thus exacerbating the       the quality or level of financial transaction occurs
dangers of contagion.                                    because a new intermediary is entering the stage,
      (3) A tightly-coupled financial system is like     and because the original holder of the mortgage –
an elaborate domino-edifice which looks good in          and his/her risk propensity – disappears behind a
times of prosperity, but which may collapse dra-         compound aggregate of bundled securities. Note
matically in times of stress. Karl Weick’s insights      that even the rating agencies have been misled
into the consequences of loose and strict coupling       by this “disappearance act” to give routinely high
(1976) will be used to shed some light on a per-         ratings for these bundles.
plexing recent transformation of global finance                Disconnecting this form of tight coupling
from a loosely- to a strictly-coupled system. This       through intermediaries according to the principle
structural change has altered the risk predisposi-       of subsidiarity would imply explicitly creating
tion of the entire system of global capitalism. It       a new next level of financial transactions. This
has created new levels of systemic risk, because         separates these kinds of securitization from “reg-
tight coupling of the system’s elements increases        ular” banking business, and confines it to a sepa-
its vulnerability through rapid contagion and an         rate form of enterprise (e.g., “Special Purpose
uncontrolled spread of toxic ingredients.                Enterprises”, which are but components of the
      Tight coupling has also been increased             shadow banking system). This enterprise is then
by structured financial products like CDO’s or           subordinated to specific rules and regulations.
CDS’2 which combine – and thus tightly con-              For example, these rules would have to include
nect – diverse businesses, branches, regions and         an answer to the question whether the original

Seite 38                        Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011

mortgage holder has to consent to the sale of his/             It seems a long way to go until the “tragedy
her mortgage, or has a right to veto it.                 of the commons” quality of systemic risk is suf-
      CDS’ are a second case in point related to the     ficiently appreciated to bring competing national
first example. CDS-contracts are quasi-insurance         states to commonly-agreed solutions. The ben-
contracts, because the buyer pays a premium,             efits of a vibrant and innovative global financial
and, in return, will receive a sum of money if one       system are huge, but they accrue in exceedingly
of the events specified in the contract, e.g., de-       differential proportions to different market par-
fault of a credit or bankruptcy of a firm, happens.      ticipants, “each of whom is motivated to maxi-
Apart from the moral-hazard problem involved,            mize use of the resource, whereas the costs of
the instrument mixes elements of investment and          exploitation, which affect the real economy, are
insurance, thus increasing tight coupling between        distributed among an even wider class of per-
investment- and insurance activities. The case is        sons” and finally burden the public budgets (and
particularly problematic, because the insurance          their staggering deficits) of the national states in-
industry is strongly regulated and subjected, for        volved (Schwarcz 2011, p. 206).
example, to Solvency II as a regulatory- and in-               The first and foremost consequence of sys-
ternal control framework. But the existing control       temic risk in global finance, therefore, appears to
frameworks are not adapted to the new mixture            be to build institutions of global rule-making in
of elements, since the seller of CDS need not be         finance. It does not have to be and probably will
a regulated entity, and the controls are useless in      not be a single institution – like the WTO for glo-
view of highly-leveraged and structured risk port-       bal trade, or the WHO for global health – but it
folios characteristic for sophisticated investment       might be a small number of institutions with dis-
(but not for the insurance business).                    tributed expertise and responsibilities centered
                                                         around the Financial Stability Board for gen-
                                                         eral policy and principles, the Base Committee
4 Outlook: Consequences for Regulation
                                                         on Banking Supervision for banking regulation,
  and Supervision
                                                         and the IMF for money and credit policies. This
The consequences for defining, understanding             supervisory network might be complemented by
and managing financial systemic risk are far             activities by the USA and the EU at the national/
from clear. Presumably, no expert would advo-            transnational level to institute systemic risk-
cate a single overall solution in view of a highly       oversight councils, in order explicitly to include
complex and sophisticated problem like system-           a macro-prudential and long-term view in their
ic risk. And, in principle, it is easy to agree to       supervisory actions (Katz, Christie 2010, p. 2).
the idea of the benefits of “cognitive diversity”
for handling exceedingly complicated problem             Notes
constellations. However, the discord and vicis-
situdes of the international discussion following        1) CDO stands for Collateralized Debt Obligation.
the global financial crisis are to some extent dis-      2) CDS stands for Credit Default Swaps.
heartening. The national states and, in particular,
the EU, have missed an opportunity to perform            References
adequately: “The collective performance was
                                                         Baker, D.; McArthur, T., 2009: The Value of the “Too
inelegant, not least inside the European Union.          big to fail” Big Bank subsidy. Issue Brief. September
[…] the crisis underlined the crucial importance         2009. Center for Economic and Policy Research. Wash-
of much better collaborative instruments for the         ington, DC; (download 15.3.11)
oversight and stabilization of integrating finan-        Bhidé, A., 2009: An Accident Waiting to Happen.
cial markets” (Pauly 2009, p. 955). In spite of          Center on Capitalism and Society. Columbia Univer-
obvious and looming systemic risks, the political        sity. Working Paper No. 39, May 2009; http://www.
actors in the advanced democratic national states (download
fear the next election more than systemic risk.          28.10.11)

Technikfolgenabschätzung – Theorie und Praxis 20. Jg., Heft 3, Dezember 2011                         Seite 39

Brewer, E.I.; Jagtiani, J., 2009: How Much did Banks       partment. University of Frankfurt, unpublished paper;
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