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 Tuesday, 12 April 2011

The leaders' focus on prevention rather than escape of the systematic risks

 

Deep anxiety over the hardly observable systematic risks that cause financial crises and therefore the fragility of the global financial systems brought me to the Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations—Background Paper. The report to the G-20 Finance Ministers and Central Bank Governors was prepared by the staff of the International Monetary Fund and the Bank for International Settlements, and the Secretariat of the Financial Stability Board in October 2009. The questionnaire of the survey was sent to 27 central banks, the central banks of G-20 and central banks of other countries which are treated as host countries of important international banks. The purpose of the study was to find out how countries identify and assess systematic relevance and whether the countries consider any particular sector and individual institution within that sector systematic.

According to the survey respondents identified the banks as the most systematically important institutions. It was also revealed that the stock market, interbank money market, foreign exchange market and government debt market have the greatest systemic impact among markets. Moreover, many countries acknowledged that their payment and settlement systems are critically important infrastructure which is required for smooth functioning of the financial systems and, in addition to that, the respondents specified that the size, interconnectedness, leverage, maturity mismatches and concentration risk were the most important factors contributing to the systematic importance of the financial crises.

The survey accomplished more than a year ago shows clearly views and perceptions of the 27 most influential central banks regarding the systematic risks and is a keystone for G-20 leaders, the Central Bank Governors and the financial stability preserving international bodies to pursue financial system’s improvements, id est. enhance international cooperation, improve access to timely data on inter-institutional exposures and solve existing information gaps in markets and infrastructure.

However, improved quantitative and qualitative indicators, stress tests, scenario analysis and assessments of market developments are just techniques to identify systematic risk and ongoing legal, operational, regulatory and supervisory improvements are just the emergency guidance in the event of financial crises.

Thus, I wonder more about the G-20 leaders, the Central Bank Governors and the financial stability preserving international institutions’ extreme focus and concentration on the improvements of the current financial systems rather than stepping back and analysing broader the potential impact of proposed political leaders’ decisions on the attractiveness of business environment and global economy state. From my point of view, some systematic risks may not be caused by financial institutions and the reasons of them may not be identified on the balance sheets. So, while leaders try to find solutions how to prevent but not how to avoid systematic risks, the possibilities of the recurrent financial crises are highly reliable.