RD News 15Feb12

• BCBS/Joint Forum: Report on intra-group support measures
• Overview of the use of intra-group support measures in times of stress or unexpected loss by financial groups across the banking, insurance and securities sectors.
• Majority indicated centralised capital and liquidity management systems are in place. According to proponents, this approach promotes the efficient management of a group’s overall capital level and helps maximise liquidity while reducing the cost of funds.
• However, the respondents that favoured a “self-sufficiency” approach pointed out that centralised management potentially has the effect of increasing contagion risk within a group in the event of distress at any subsidiaries.

• Charles Plosser (Pres Philadelphia Fed): The outlook and the hazards of accelerationist policy
• Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources.
• Constant acceleration only makes these risks even more hazardous. Slamming on the brakes or abruptly changing course could disrupt the economy. Failing to slow down and exit at the right time risks excessive inflation.

• Jean-Pierre Danthine (SNB): Reconciling price and financial stability
• Two main dimensions of systemic risk:
• the “structural” dimension, which covers the possible risks associated with individual institutions whose failure would endanger the entire system;
• the “cyclical” dimension refers to systemic risks which are not directly linked to an individual institution, but which stem from financial institutions’ collective responses to business or financial fluctuations and adverse shocks.
• “Structural tools” strive to reduce the impact of institutional failure by strengthening individual institutions. Their potential utility is often cited with regard to institutions which are considered “too big to fail” or “too interconnected to be liquidated” and whose failure would impact the entire system.
• “Countercyclical tools” aim to address the cyclical dimension of risk by reducing feedback loops.
• By reducing the probability of a severe crisis, the benefit of countercyclical buffers is on average 10 times higher than their costs in terms of real output growth per year.

• OFR: A Survey of Systemic Risk Analytics
• Survey of 31 quantitative measures of systemic risk in the economics and finance literature.
• ‘Because systemic risk is a multifaceted problem in an ever-changing financial environment, any single definition is likely to fall short, and may create a false sense of security as financial markets evolve in ways that escape the scrutiny of any one-dimensional perspective.’
• In many cases, academic researchers have made do with publicly available data, adjusting their modeling approaches accordingly. This is a constraint that regulators will not necessarily face, given the mandates and authorities granted to them by recent legislation.
• Definitions of each risk measure—including required inputs, expected outputs, and data requirements – in appendix.
• To encourage experimentation and innovation among as broad an audience as possible, we have developed open-source Matlab code for most of the analytics surveyed.