Bank Indonesia
7th annual international Seminar
Expanding the perimeter of
financial regulation :
focusing on systemic risk
Philippe Mongars
Many factors played a role in the financial crisis
Inadequate implementation of the OTD approach to credit extension :
from know your customer to passing on risk and generating fees. An
original sin in credit risk management?
Risk-management weaknesses at large global financial institutions that
created and held complex credit products. (risk spreading proved to be
much less extensive than many believed)
much less extensive than many believed)
Lessons for Risk Management at firms
Risk identification and measurement, valuation, liquidity and governance
Lessons for regulators
1. Changes in risk management practices required
fall into 4 categories
risk identification and measurement
valuation issues
liquidity management
liquidity management
governance and misaligned incentives
2.Supervisory responses
Risk identification and measurement
Risk management process
Credit terms
IT capabilities
IT capabilities
Risk metrics
Stress tests,
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Nodes are scaled by (Total External Assets + Total External Liabilities) for each node,
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1 & 3 Chan-Lau, Espinosa and Solé (2009) 2 Giesecke and Kim (2009)
Systemic risk management – some academic proposals
Kashyap et al. (2008) Asharya et al. (2008) Perotti-Suarez (2009)
Nature of the insurance
Bank capital Regulated institutions’ capital Liquidity (possibly capital)
for institutions have access to public guarantee
schemes
Participation Optional Mandatory Mandatory
Insurer Private Public + private International liquidity
insurance fund
Price To be determined by the Market measure of the A proportion of short term
Price calculation
To be determined by the institution
Market measure of the systemic risk of the institution
A proportion of short term marketable debt
Trigger for compensation
Cumulative losses over the
preceding 4 quarters exceeding a predefined amount
Cumulative losses in the financial system (or the national economy) exceeding a predefined amount set by regulators
Aggregate liquidity
squeeze in the interbank market, to be determined by supervisors
Compensation amount
A share of the aggregate system losses in a range of 100-200 Bn
Help meet the target of 8% solvency ratio
Institutional challenges
Best positioned to monitor systemic risk = Central banks
Should that body be independent or not?
On going discussion across jurisdictions to set up institutions to perform this
duty with possible different approach : US approach vs. EU approach ;
duty with possible different approach : US approach vs. EU approach ;
The setting up of the European Systemic Risk Council
Combining the two components of macrosupervision (systemic and macroeconomic) with
the two approaches (automatic and discretionary) produces an interesting classification,
which is presented in the table below:
