I believe that establishing the means to measure and monitor systemic risk on an ongoing basis is the single-highest priority for financial regulatory reform.

Andrew Lo, Professor, MIT, 2009

There is no issue more fundamental to international regulatory reform in financial services than developing and implementing a systemic risk regime. Although several agencies internationally have worked on assessing systemic risk, in 2007 none of them saw the financial crisis coming or initiated actions to avoid or mitigate it. And yet, some individual commentators could and did and, in several high profile firms, risk managers were warning of the dangers building in the financial system.

There have been many analyses of the causes of the financial crisis, some of a very high quality and some clearly representing sectoral interests. Policy makers must distil these analyses and develop a programme that will reduce significantly the risk of a subsequent financial crisis of similar proportions, all without destroying the financial performance of firms in the sector. Clearly, deleveraging and increased capital buffers for specific risks – liquidity and more severe correlated stress examples – have already been implemented. So have ‘living wills’. In the US and at the EU work is underway on defining systemic risk monitoring requirements.

Yet there remain many unanswered questions: who and what is systemically important? Can we model interconnectedness and network exposures effectively? Can we ever realistically share data globally between different countries’ systemic regulators? What data? What quality of data? Housed where and by whom?

These and other questions must be answered before we will have met the G20 objective of establishing a meaningful global framework for systemic oversight. Paradigm Risk and our research partners, JWG, are helping to find answers to these difficult questions. Because we specialise in answer difficult questions about risk.

The recent financial crisis revealed important gaps in data collection and systematic analysis of institutions and markets. Remedies to fill those gaps are critical for monitoring systemic risk and for enhanced supervision of systemically important financial institutions, which are in turn necessary to decrease the chances of such a serious crisis occurring in the future.

Daniel K Tarullo, FRB Governor, testifying before a US Senate Subcommittee, 12 February 2010

KEY RESEARCH PARTNER

Leading think tank in FS regulation

JWG are our research partner undertaking a review of systemic risk for the Technology Strategy Board and FS KTN

SUBMISSION TO FSA

On data for systemic risk reporting

Click here for our joint submission with research partners JWG on FSA consultation paper CP 10/11 on information-gathering powers.

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