Apr 01, 2013
• Bylined Articles
New Infrastructures For a Sounder Financial System
Michael Bodson, Chief Executive Officer
Dramatic improvements in information and communication technologies are the main factor behind the tremendous expansion of securities and derivatives markets since the 1980s, which has made financial intermediation more of a trade‑based rather than a relationship‑based activity. The result is that every systemically important financial institution (SIFI) has a globally distributed web of exposures to a multitude of other market participants in the system, which makes the identification of aggregate risk or systemic fragility a complex task. In addition, the availability and accessibility of data in financial markets has remained largely siloed within specific markets, infrastructures and jurisdictions. Indeed, without relevant data on all existing trades, the ability to accurately identify risk exposure in an interconnected global financial system has become all but impossible for both participants and regulatory authorities, especially with traditional risk management techniques such as “value at risk” being widely criticised after the 2008 crisis.
Over the past two decades, one could argue that the public and the regulatory authorities relied, to a certain degree, on the self‑correcting abilities of financial markets. Officials, such as the Federal Reserve in the United States and the European Commission’s Internal Market, have articulated on several occasions the importance of allowing self‑correcting forces in financial markets to run their course. While there have been a number of disruptive events, they have had a limited impact in time and scope primarily because few markets and institutions appeared to suffer long‑term negative impacts. Furthermore, the financial crises that had major impacts on developing countries in the 1990s were largely attributed to structural weaknesses in those economies rather than fundamental issues in the way contemporary financial markets and their associated risks were managed.
Download the Congressional Testimony: New infrastructures for a sounder financial system