Systemic risk in modern financial systems: analytics and policy design

Systemic risk in modern financial systems: analytics and policy design Purpose – In recent years, the financial system has been changing rapidly. At the same time, macroeconomic volatility has fallen in developed countries. The purpose of this paper is to examine how these developments may have affected the nature of systemic crises. The paper also aims to discuss how central banks and other financial regulators might respond to these developments with a clearer, more rigorous, operational framework for their systemic financial stability work. Design/methodology/approach – The paper describes analytical models developed at the Bank of England to assess how recent developments may have affected the probability and potential impact of systemic financial crises. The results from these models help to shape the practical framework for the Bank's financial stability work. Findings – The models suggest that financial innovation and integration, coupled with greater macroeconomic stability, have served to make systemic crises in developed countries less likely than in the past, but potentially more severe. Implementing a practical framework for financial stability work in response to this raises many formidable challenges. Practical implications – If individuals are risk‐averse, the recent change in the profile of crises could lower welfare and would suggest that policymakers should place a higher premium on actions to monitor and mitigate systemic risk. The analysis also highlights the importance of differentiating the probability of risks from their potential impact. Originality/value – The paper will be of interest to academics interested in systemic risk, central bankers, financial regulators, and financial market participants. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Systemic risk in modern financial systems: analytics and policy design

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Publisher
Emerald Publishing
Copyright
Copyright © 2007 Emerald Group Publishing Limited. All rights reserved.
ISSN
1526-5943
DOI
10.1108/15265940710732387
Publisher site
See Article on Publisher Site

Abstract

Purpose – In recent years, the financial system has been changing rapidly. At the same time, macroeconomic volatility has fallen in developed countries. The purpose of this paper is to examine how these developments may have affected the nature of systemic crises. The paper also aims to discuss how central banks and other financial regulators might respond to these developments with a clearer, more rigorous, operational framework for their systemic financial stability work. Design/methodology/approach – The paper describes analytical models developed at the Bank of England to assess how recent developments may have affected the probability and potential impact of systemic financial crises. The results from these models help to shape the practical framework for the Bank's financial stability work. Findings – The models suggest that financial innovation and integration, coupled with greater macroeconomic stability, have served to make systemic crises in developed countries less likely than in the past, but potentially more severe. Implementing a practical framework for financial stability work in response to this raises many formidable challenges. Practical implications – If individuals are risk‐averse, the recent change in the profile of crises could lower welfare and would suggest that policymakers should place a higher premium on actions to monitor and mitigate systemic risk. The analysis also highlights the importance of differentiating the probability of risks from their potential impact. Originality/value – The paper will be of interest to academics interested in systemic risk, central bankers, financial regulators, and financial market participants.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: Mar 6, 2007

Keywords: Financial risk; Economic stability

References

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