Read more
An accessible and detailed overview of the risks posed by financial institutions
Understanding Systemic Risk in Global Financial Markets offers an accessible yet detailed overview of the risks to financial stability posed by financial institutions designated as systemically important. The types of firms covered are primarily systemically important banks, non-banks, and financial market utilities such as central counterparties. Written by Aron Gottesman and Michael Leibrock, experts on the topic of systemic risk, this vital resource puts the spotlight on coherency, practitioner relevance, conceptual explanations, and practical exposition.
Step by step, the authors explore the specific regulations enacted before and after the credit crisis of 2007-2009 to promote financial stability. The text also examines the criteria used by financial regulators to designate firms as systemically important. The quantitative and qualitative methods to measure the ongoing risks posed by systemically important financial institutions are surveyed.
* A review of the regulations that identify systemically important financial institutions
* The tools to use to detect early warning indications of default
* A review of historical systemic events their common causes
* Techniques to measure interconnectedness
* Approaches for ranking the order the institutions which pose the greatest degree of default risk to the industry
Understanding Systemic Risk in Global Financial Markets offers a must-have guide to the fundamentals of systemic risk and the key critical policies that work to reduce systemic risk and promoting financial stability.
List of contents
Contents
Preface xiii
Acknowledgments xvii
About the Authors xviii
CHAPTER 1
Introduction to Systemic Risk 1
What Is Systemic Risk? 2
Systemic Risk Drivers 3
Why Systemic Risk Must Be Understood, Monitored, and Managed 5
CHAPTER 2
How We Got Here: A History of Financial Crises 9
Common Drivers of Historical Crises 10
Bursting of Asset Bubbles 10
Banking Crises 14
Sovereign Debt Crisis 15
International Contagion 18
CHAPTER 3
The Credit Crisis of 2007-2009 24
Planting the Seeds of a Bubble: The Early 2000s 25
Wall Street's Role 27
The U.S. Government Takeover of the GSEs 30
The Tipping Point: Lehman Brothers' Failure 32
Aftermath of the Credit Crisis 35
Cost of Government Bailouts 37
CHAPTER 4
Systemic Risk, Economic and Behavioral Theories: What Can We Learn? 44
Minsky Three-Part Model 45
Debt Deflation Cycle 46
Benign Neglect 47
Behavioral Theories 48
Risk Aversion Bias 49
Asset Prices 50
Homogeneous Expectations versus Heterogeneity 51
Anchoring Heuristic 52
Excessive Optimism 52
Familiarity Bias 53
Fallacy of Composition 53
Fight or Flight 53
CHAPTER 5
Systemic Risk Data 59
Key Data Attributes 60
Key Policy Changes to Address Data Gaps 60
Data Sources 63
Data Collection Challenges and Remaining Gaps 63
Move Toward Standardization: Legal Entity Identifier Initiative 68
CHAPTER 6
Macroprudential versus Microprudential Oversight 73
A Comparison of Macroprudential versus Microprudential 74
Microprudential Policies 74
Macroprudential Policies 76
A Historical Perspective on Macroprudential Tools 77
Choice of Macroprudential Policy Tools 79
CHAPTER 7
Introduction to the U.S. Regulatory Regime 84
Who Are the Regulators? 84
U.S. Regulatory Approaches 86
Comparison of U.S. versus International Financial Regulatory Regimes 87
Introduction to the Dodd-Frank Act 90
CHAPTER 8
Introduction to International Regulatory Regimes 97
The Financial Stability Board 97
The Basel Accords 99
The European Systemic Risk Board 99
Principles for Financial Market Infrastructures 102
CHAPTER 9
Systemically Important Entities 107
Introduction to Systemically Important Entities 107
Classification of Entities as Systemically Important by the FSOC 108
Bank SIFIs 110
Nonbank SIFIs 110
SIFMUs 112
Globally Systemically Important Banks 112
Total Loss-Absorbing Capacity (TLAC) Requirements 114
Broad Impact of Financial Stability Requirements 117
CHAPTER 10
The Volcker Rule 120
Introduction to the Volcker Rule 120
The Volcker Rule: Details 122
Prohibition of Proprietary Trading 123
Prohibition of Ownership or Sponsorship of Hedge Funds and Private Equity Funds 123
The Volcker Rule and Systemically Risky Nonbank Financial Companies 123
Activities That Are Permitted Despite the Volcker Rule 124
Implementation of the Volcker Rule 125
Volcker Rule: Criticism 126
CHAPTER 11
Counterparty Credit Risk 130
Overview of Derivative Securities 130
Counterparty Exposure
About the author
ARON GOTTESMAN is Professor of Finance and the chair of the Department of Finance and Economics at the Lubin School of Business at Pace University. He is widely published in academic journals and is the author of
Derivatives Essentials: An Introduction to Forwards, Futures, Options, and Swaps.
MICHAEL LEIBROCK is managing director, chief systemic risk officer, and head of Counterparty Credit Risk for The Depository Trust & Clearing Corporation (DTCC). He serves as chair of DTCC's Model Risk Governance Committee and co-chair of the Systemic Risk Council, and is an active speaker globally on the topics of systemic and credit risk.
Summary
An accessible and detailed overview of the risks posed by financial institutions Understanding Systemic Risk in Global Financial Markets offers an accessible yet detailed overview of the risks to financial stability posed by financial institutions designated as systemically important.
