Sanjiv Das, Kris Mitchener, Angela Vossmeyer, 11 March 2019

The Global Crisis brought attention to how connections among financial institutions may make systems more prone to crises. Turning to a major financial crisis from the past, this column uses data from the Great Depression to study risk in the commercial banking network leading up to the crisis and how the network structure influenced the outcomes. It demonstrates that when the distribution of risk is more concentrated at the top of the system, as it was in 1929, fragility and the propensity for risk to spread increases.

Denefa Bostandzic, Felix Irresberger, Ragnar Juelsrud, Gregor Weiss, 15 January 2018

Since the financial crisis, curbing systemic risk has become a key objective for policymakers around the world. This column sheds light on how successful capital requirements are in terms of reducing systemic risk, in the context of the European banking sector. Results show that an increase in capital requirements in Europe lead to heightened measures of systemic risk, in opposition to the goals of the exercise. This does not imply, however, that capital requirements are welfare decreasing.

Meghana Ayyagari, Thorsten Beck, Maria Soledad Martinez Peria, 11 December 2018

Macroprudential tools have been implemented widely following the Global Crisis. Using data from 900,000 firms in 49 countries, this column finds that such policies are associated with lower credit growth during the period 2003-2011. The effects are especially significant for micro, small and medium-sized enterprises and young firms that are more financially constrained and bank dependent. The results imply a trade-off between financial stability and inclusion.

Alex Brazier, 26 October 2018

Thanks to transformative post-crisis reforms, the financial system is safer and simpler than it was a decade ago. But the structure of the system continues to evolve, partly in reaction to those reforms. Economies are now more reliant on market-based finance. This column argues that to deliver the macroprudential objective of a system that is able to serve households and businesses in bad times as well as good, policymakers must run stress simulations on systemic markets as well as systemic banks, and take pre-emptive corrective action where necessary.

Ester Faia, Sébastien Laffitte, Gianmarco Ottaviano, 20 September 2018

There is a general consensus that lax monetary policy and banking globalisation were two critical factors behind the Global Crisis. This column explores how banks’ decisions to enter foreign markets impacted their individual and systemic risk. Results from a sample of European banks suggest that banks’ foreign expansions decreased risk from both an individual and systemic viewpoint. The findings cast doubt on the idea that banking globalisation was one of the culprits behind the crisis.

Andrew Ellul, Chotibhak Jotikasthira, Anastasia Kartasheva, Christian Lundblad, Wolf Wagner, 05 June 2018

Systemic risk analyses have largely focused on the linkages among financial institutions’ funding arrangements, but there are increasing connections between insurers and the rest of the financial system. This column explores how systemic risk can originate from insurers’ business models. In the event of negative asset shocks, insurers’ collective allocation to illiquid bonds leads to an amplification of system-wide fire sales. These dynamics can plausibly erase up to 20-70% of insurers’ aggregate equity capital.

Jon Danielsson, Jean-Pierre Zigrand, 19 March 2018

Nearly ten years on from the Global Crisis, systemic risk continues to threaten global economic stability. Using the analogy of London's Millennium Bridge, in this video Jon Danielsson and Jean-Pierre Zigrand explain systemic risk as the result of agents behaving rationally at the individual level to protect their own interests. This video was originally published by the LSE's Systemic Risk Centre.

Ron Anderson, Chikako Baba, Jon Danielsson, Heedon Kang, Udaibir Das, Miguel Segoviano, 15 February 2018

Current stress testing of banks is focused on the resiliency of individual banks to exogenous shocks. This column describes how the next generation of macroprudential stress tests aim to capture the endogenous nature of systemic risk caused by the interaction of all the institutions and markets making up the financial system. This will lead to a better policy mix aimed at preserving financial stability.

Natalia Tente, Natalja von Westernhagen, Ulf Slopek, 06 December 2017

Regulators are still debating the amount of capital needed to support bank losses in a financial crisis. This column presents a new, pragmatic stress-testing tool that can answer the question under macroeconomic stress scenarios. The method models inter-sector and inter-country dependence structures between banks in a holistic, top-down supervisory framework. A test of 12 major German banks as of 2013 suggests that while there is enough capital in the system as a whole, capital allocation among the banks is not optimal.

Yener Altunbaş, Mahir Binici, Leonardo Gambacorta, Andres Murcia, 05 December 2017

The main objective of macroprudential tools is to reduce systemic risks – in particular, the frequency and depth of financial crises. Most studies look at the impact of macroprudential measures on credit growth, focusing on country-wide data or bank-level information. This column presents new evidence using credit registry data at the bank-firm level to evaluate the impact on bank risk measures. Results show that macroprudential tools help stabilise credit cycles and contain bank risk.

Vincent Bignon, Guillaume Vuillemey, 04 December 2017

To improve financial stability after the Global Crisis, regulators have mandated the use of central clearing counterparties for standardised derivatives. While they are designed to insulate investors against counterparty risk, the central clearing counterparties themselves can fail. This column uses historical data to discuss how this can happen. The results show the risks to financial stability when a central clearing counterparty starts gambling for its resurrection.

Stephen Cecchetti, Kim Schoenholtz, 03 December 2017

The Global Crisis dramatically revealed the severity of ignorance about risk exposure in the global financial system. A major issue is the complexity of legal structures with webs of subsidiaries and a lack of consolidated information systems. This column describes efforts to address these failings through the launching of a global legal entity identifier. The initiative offers great promise for addressing the complex information problems. However, network externalities imply that its success will depend on participation and adoption incentives.

Jon Danielsson, 15 November 2017

Artificial intelligence is increasingly used to tackle all sorts of problems facing people and societies. This column considers the potential benefits and risks of employing AI in financial markets. While it may well revolutionise risk management and financial supervision, it also threatens to destabilise markets and increase systemic risk.

Jon Danielsson, Robert Macrae, Eva Micheler, 31 May 2017

Brexit is likely to cause considerable disruption for financial markets. Some worry that it may also increase systemic risk. This column revisits the debate and argues that an increase in systemic risk is unlikely. While legal ‘plumbing’ and institutional and regulatory equivalence are of concern, systemic risk is more likely to fall due to increased financial fragmentation and caution by market participants in the face of uncertainty. 

Thorsten Beck, Olivier De Jonghe, Klaas Mulier, 09 May 2017

There is little empirical evidence that specialised banks are less stable or perform worse, as suggested by standard portfolio diversification theory. This column uses new data to argue that more specialised banks between 2002 and 2012 did not perform as theory would suggest. More specialised banks, and banks with similar sectoral exposures to their peers, suffered less volatility and had lower exposure to systemic risk. The lack of post-crisis regulatory reform in this area may, accidentally, have been a good thing.

Thomas Gehrig, Maria Chiara Iannino, 21 April 2017

The first Basel Accord initiated what has become a three decade-long process of regulatory convergence of the international banking system. This column argues that by trying to regulate minimal capital standards, the Basel process itself contributed to an ever-increasing shortfall in aggregate bank capital. Consequently, European banks have become increasingly exposed to systemic risk, suggesting that expansive monetary policy could adversely affect the resiliency of banks. 

Claudia Buch, Lena Tonzer, Benjamin Weigert, 06 March 2017

In response to the Global Crisis, governments have implemented restructuring and resolution regimes backed by funds financed by bank levies. Bank levies aim to internalise system risk externalities and to provide funding for bank recovery and resolution. This column explores bank levy design by considering the German and European cases. The discussion points to the importance of structured policy evaluations to determine the effects of levies.

Felix Hufeld, Ralph Koijen, Christian Thimann, 30 January 2017

Despite the importance of insurance, discussions about the macroeconomic role and the risks of insurance markets have been surprisingly limited. This column explores some of the key theoretical and conceptual questions still unanswered in this field, and suggests that a two-fold approach combining a focus on individual firms and an activity-based approach across the sector is needed to tackle systemic risk within the insurance industry.

Jon Danielsson, Robert Macrae, 08 December 2016

Political risk is a major cause of systemic financial risk. This column argues that both the integrity and the legitimacy of macroprudential policy, or ‘macropru’, depends on political risk being included with other risk factors. Yet it is usually excluded from macropru, and that could be a fatal flaw.

Xavier Vives, 06 December 2016

As with previous systemic crises, the 2007-2009 crisis has created regulatory reform, but is it adequate? This column argues that prudential regulation should consider interactions between conduct – capital, liquidity, disclosure requirements, macroprudential ratios – and structural instruments, and also coordinate with competition policy. Though recent reforms are a welcome response to the latest crisis, we do not know how effective they will be in future.

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