ProdukHukum BankIndonesia
Bank Indonesia
7th annual international Seminar
Expanding the perimeter of
financial regulation :
focusing on systemic risk
Philippe Mongars
Deputy head of Financial Stability Directorate
26/08/2009
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)
Lessons for Risk Management at firms
Risk identification and measurement, valuation, liquidity and governance
Lessons for regulators
Would new risk management practices at firms suffice?
DIRECTION DE LA STABILITE FINANCIERE
2
1. Changes in risk management practices required
fall into 4 categories
risk identification and measurement
valuation issues
liquidity management
governance and misaligned incentives
2.Supervisory responses
Systemic risk measurement
Systemic risk mitigation
DIRECTION DE LA STABILITE FINANCIERE
3
Risk identification and measurement
Risk management process
Credit terms
IT capabilities
Risk metrics
Stress tests,
Liquidity funding
Triggers
DIRECTION DE LA STABILITE FINANCIERE
4
!
"
$
% !
&'
(
)
!
DIRECTION DE LA STABILITE FINANCIERE
5
#
Systemic risk measurement
*!
!
!
!
!
!
+
!
,
-*
!
!
!
!
.+ /
"
!
!
!
!
DIRECTION DE LA STABILITE FINANCIERE
6
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4
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7
DIRECTION DE LA STABILITE FINANCIERE
7
"
#
+
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6
!
+
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+
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6
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+ 9
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8
DIRECTION DE LA STABILITE FINANCIERE
8
0
:
*!
!
!
$
!
2 ,
!
%
&
'
0
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8
3
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9
7
!
0
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0
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3
3 6 2 ;7
)
!
'
<
'
0
9
DIRECTION DE LA STABILITE FINANCIERE
9
:
Nodes are scaled by (Total External Assets + Total External Liabilities) for each node,
and links between nodes i and j by (Total External Assetsij + Total External Liabilitiesij )/(GDPi +
GDPj). The data are developed and analyzed in Kubulec and Sa (2008).
10
DIRECTION DE LA STABILITE FINANCIERE
10
*!
!
=
11
DIRECTION DE LA STABILITE FINANCIERE
11
!
1 & 3 Chan-Lau, Espinosa and Solé (2009)
2 Giesecke and Kim (2009)
4 Segoviano & Goodhart (2009)
12
DIRECTION DE LA STABILITE FINANCIERE
12
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
Insurer
Optional
Private
Mandatory
Public + private
Mandatory
International liquidity
insurance fund
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
Cumulative losses in the
preceding 4 quarters exceeding a financial system (or the
predefined amount
national economy)
exceeding a predefined
amount set by regulators
Compensation A share of the aggregate system
amount
losses in a range of 100-200 Bn
USD), when losses exceed that
level, the amount is capped
Help meet the target of 8%
solvency ratio
DIRECTION DE LA STABILITE FINANCIERE
13
Aggregate liquidity
squeeze in the interbank
market, to be determined
by supervisors
Undefined
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 ;
The setting up of the European Systemic Risk Council
Furthermore, in an integrated financial system, judgments have to be made on
a worldwide basis.
DIRECTION DE LA STABILITE FINANCIERE
14
(
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:
Source : Banque de France, JP Landau
DIRECTION DE LA STABILITE FINANCIERE
15
(
Thank you
DIRECTION DE LA STABILITE FINANCIERE
16
7th annual international Seminar
Expanding the perimeter of
financial regulation :
focusing on systemic risk
Philippe Mongars
Deputy head of Financial Stability Directorate
26/08/2009
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)
Lessons for Risk Management at firms
Risk identification and measurement, valuation, liquidity and governance
Lessons for regulators
Would new risk management practices at firms suffice?
DIRECTION DE LA STABILITE FINANCIERE
2
1. Changes in risk management practices required
fall into 4 categories
risk identification and measurement
valuation issues
liquidity management
governance and misaligned incentives
2.Supervisory responses
Systemic risk measurement
Systemic risk mitigation
DIRECTION DE LA STABILITE FINANCIERE
3
Risk identification and measurement
Risk management process
Credit terms
IT capabilities
Risk metrics
Stress tests,
Liquidity funding
Triggers
DIRECTION DE LA STABILITE FINANCIERE
4
!
"
$
% !
&'
(
)
!
DIRECTION DE LA STABILITE FINANCIERE
5
#
Systemic risk measurement
*!
!
!
!
!
!
+
!
,
-*
!
!
!
!
.+ /
"
!
!
!
!
DIRECTION DE LA STABILITE FINANCIERE
6
# !
0
1
!
"2 ,#
!
2 ,
(
4
! !
!
!
3
!
!
!
(
!
! ! 5
!
!
!
!
! !
7
DIRECTION DE LA STABILITE FINANCIERE
7
"
#
+
!
*!
!
6
!
+
!
+
!0
6
+
!
7
8
!
!
!
)
!
0
!
6
+
6
+ 9
!
0
$
-
.
8
DIRECTION DE LA STABILITE FINANCIERE
8
0
:
*!
!
!
$
!
2 ,
!
%
&
'
0
*!
!
)
8
3
)
0
(
!
*!
9
7
!
0
!
0
!
3
3 6 2 ;7
)
!
'
<
'
0
9
DIRECTION DE LA STABILITE FINANCIERE
9
:
Nodes are scaled by (Total External Assets + Total External Liabilities) for each node,
and links between nodes i and j by (Total External Assetsij + Total External Liabilitiesij )/(GDPi +
GDPj). The data are developed and analyzed in Kubulec and Sa (2008).
10
DIRECTION DE LA STABILITE FINANCIERE
10
*!
!
=
11
DIRECTION DE LA STABILITE FINANCIERE
11
!
1 & 3 Chan-Lau, Espinosa and Solé (2009)
2 Giesecke and Kim (2009)
4 Segoviano & Goodhart (2009)
12
DIRECTION DE LA STABILITE FINANCIERE
12
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
Insurer
Optional
Private
Mandatory
Public + private
Mandatory
International liquidity
insurance fund
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
Cumulative losses in the
preceding 4 quarters exceeding a financial system (or the
predefined amount
national economy)
exceeding a predefined
amount set by regulators
Compensation A share of the aggregate system
amount
losses in a range of 100-200 Bn
USD), when losses exceed that
level, the amount is capped
Help meet the target of 8%
solvency ratio
DIRECTION DE LA STABILITE FINANCIERE
13
Aggregate liquidity
squeeze in the interbank
market, to be determined
by supervisors
Undefined
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 ;
The setting up of the European Systemic Risk Council
Furthermore, in an integrated financial system, judgments have to be made on
a worldwide basis.
DIRECTION DE LA STABILITE FINANCIERE
14
(
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:
Source : Banque de France, JP Landau
DIRECTION DE LA STABILITE FINANCIERE
15
(
Thank you
DIRECTION DE LA STABILITE FINANCIERE
16