Tobias Adrian and Michael Abrahams*
The 2007-09 financial crisis spread to markets and institutions around the world, demonstrating why global systemic risk is a major concern in modern financial markets. Funding difficulties in one country can spill over to other countries via internationally active institutions, and the risk of dire financial outcomes can be transmitted across the globe. Because the crisis caused sudden and significant damage to people’s wealth and income, efforts to prevent a recurrence are imperative. The task will be a challenging one, however, owing to the complexity of modern financial markets, institutions, and regulatory regimes.
On November 17, the New York Fed—in partnership with the Society for Financial Econometrics and New York University’s Volatility Institute—will sponsor a conference on global systemic risk, bringing in top experts to take stock of the latest thinking on this issue. The conference papers were posted today.
We asked experts in banking, regulation, and financial economics to review four key questions:
1. Can we measure how much a financial institution’s activities or holdings expose it to or help create systemic risk? For example, what are the benefits of monitoring market-based indicators, balance sheet measures (such as leverage), credit default swap spreads, ratings, or portfolio holdings?
2. How does money flow across borders, both within institutions and among them?
3. What pathways does global contagion follow? Are there useful early warning indicators that can measure systemic risk on a macro level that looks beyond individual institutions?
4. What are the latest proposals for regulation to help prevent a new crisis, including implied insurance charges and effective stress testing, and how could they be improved? How should we think about the sections of the Dodd-Frank Act that aim to reduce systemic risk, the Basel Committee on Banking Supervision’s proposed capital surcharge for global systemically important financial institutions (GSIFIs), and various initiatives by other international bodies, including the Group of Twenty, the Financial Stability Board, and the International Monetary Fund?
Other highlights of the conference include two keynote speeches, “Re-plumbing the Financial System: Uneven Progress” by Stanford’s Darrell Duffie and “Measuring Global Systemic Risk” by New York University’s Viral Acharya, as well as a discussion panel drawn from leading figures from government, academia, and industry.
The Global Systemic Risk conference will be held at the New York Fed and is open to academics and researchers in finance and economics. If you would like to participate, please send an e-mail to NYGlobal.Sysrisk2011@ny.frb.org by November 10.
We invite questions from our blog readers to put forward to this group as well.
*Michael Abrahams is an assistant economist in the Research and Statistics Group of the Federal Reserve Bank of New York.
The views expressed in this blog are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).