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Measuring systemic risk

Measuring systemic risk . Stephen G Cecchetti Bank for International Settlements. SUERF/Deutsche Bundesbank/IMFS Conference “The ESRB at 1” 8 November 2011 Berlin, Germany. 1.

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Measuring systemic risk

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  1. Measuring systemic risk Stephen G Cecchetti Bank for International Settlements SUERF/Deutsche Bundesbank/IMFS Conference “The ESRB at 1” 8 November 2011 Berlin, Germany 1 The views expressed in these slides are those of the presenter and do not necessarily reflect those of the Bank for International Settlements.

  2. Systemic risk: what do we want to measure? Common exposures: • How big were European banks exposures to USD subprime? • How exposed are US entities to European sovereigns? Leverage: • How much leverage is embedded in synthetic instruments? • How much does embedded leverage contribute to system-wide leverage? Maturity transformation: • How much maturity transformation is there in the system? • How much currency transformation is there is taking place? Cross-border structure: • Non-banks in my country rely heavily on cross-border funding. How fickle is it? • If wholesale funding dries up elsewhere, how will it affect my housing market?

  3. What did we miss? European banks’ net US dollar balance sheet • Net = Assets - Liabilities • Investment in non-banks… • “desired investment portfolio” • longer term assets • Includes USTs and CDOs • Funded by … • Interbank borrowing • Foreign exchange reserves • Cross currency position: FX swaps into USD (implied)

  4. FX swaps: How can markets price risks they cannot see? from previous slide (plus CA and JP banks’ positions)

  5. Cross-border bank structure matters !

  6. Identifying vulnerabilities • Joint analysis of data covering many institutions can uncover … • Common exposures • Concentrated funding patterns • System-level leverage and maturity transformation • Broad dissemination  improves market discipline • Crisis management: choosing a course of action for distressed firms

  7. Where do we stand? • Current challenges: • No national supervisor has a global perspective • No infrastructure for sharing of confidential data • No system-level view and analysis • The Initiatives: • CGFS enhancements to BIS international banking statistics • Aggregate data with “geography” (eg TRUST Ltd) • FSB-G20 data gaps process: • Bank-level data collection

  8. Thank you.

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