The fundamentals of systemic risk, and the key critical policies that work to reduce systemic risk and promote financial stability, are the subjects of a new book co-authored by Michael Leibrock, DTCC Managing Director and head of Credit and Systemic, and Aron Gottesman, Professor of Finance and the chair of the Department of Finance and Economics at the Lubin School of Business at Pace University.
While no globally accepted definition of systemic risk exists, such risks are generally considered to consist of events that not only cause a significant dislocation in the financial or credit markets, but have the potential to impact the economy. History has shown that systemic risks can have many root causes, including, but not limited to, the failure of a large, interconnected financial institution(s) such as Lehman Brothers, the default of a sovereign entity on its external debt, the dramatic and unexpected decline in a particular asset class or securities market that leads to a contagion effect.
Although systemic risks have been occurring for centuries, the topic has only become a central concern since the financial crisis of 2007–2009. With new and varied forms of threats to financial stability arising since the financial crisis, careful identification, monitoring and management of systemic risk is paramount, according to the Leibrock and Gottesman.
In the book, Understanding Systemic Risk in Global Financial Markets (Wiley Finance) 1st Edition, Leibrock and Gottesman explore:
- The risks to financial stability posed by financial institutions designated as systemically important.
- The specific regulations enacted before and after the credit crisis of 2007-2009 to promote financial stability.
- The criteria used by financial regulators to designate firms as systemically important.
- The quantitative and qualitative methods used to measure the ongoing risks posed by systemically important financial institutions.
- The tools to use to detect early warning indications of default.
- Techniques to measure interconnectedness.
- Approaches for ranking the institutions that pose the greatest degree of default risk to the industry.
In the book, Leibrock and Gottesman examine systemic risk from a historical perspective, drawing parallels and common themes from events such as the Dutch Tulip Crisis, South Street Sea Bubble, The Great Depression and the Credit Crisis of 2007–2009, and offer their perspectives on how lessons learned from such events can still prove useful in preparing for and anticipating future crises.
“Given the ever-changing landscape and complexity of systemic threats, it is imperative that stakeholders in the financial industry remain vigilant, do not fall prey to complacency and collaborate very closely going forward,” Leibrock said.
The book concludes with a forward-looking view toward the latest emerging systemic threats as identified by numerous systemic risk surveys, including those conducted by DTCC, CPMI IOSCO, Bank of England and others.