New York, NY, June 14, 2010—The Securities Industry and Financial Markets Association (SIFMA) today released the results of a study intended to assist regulators and policymakers in preparing for expanded systemic risk oversight and enhance their ability to respond to potential future systemic risk events. The guidance is aimed at supporting the financial industry's efforts to foster financial stability and accommodate the information needs of a systemic risk regulator. SIFMA believes developing the right information structure for tracking systemic risk can play a major role in the ability of the firms and regulators to identify and address potential problems before they escalate.
“SIFMA strongly supports the creation of a tough, competent systemic risk regulator to oversee systemically important firms so that the activities of one or a few firms will not threaten the stability of the entire financial system,” said Tim Ryan, SIFMA president and CEO. “With this study, we offer important insights into the development of a systemic risk regulation regime, which we hope will be useful to the regulatory community as it works to expand its monitoring of systemic risk and better understand the inter-connected risks between systemically important institutions.”
Produced together with Deloitte & Touche, the Systemic Risk Information Study is based on interviews with 22 organizations, including regulators, commercial and investment banks, insurers, hedge funds, exchanges, and industry utilities. The interviews focused on how the interviewees defined and/or viewed systemic risk, then specifically identified what type of information and data regulators would require from large, interconnected financial institutions to effectively monitor systemic risks. Systemic risks are developments that threaten the stability of the financial system as a whole and consequently the broader economy, not just that of one or two institutions.
Among the study’s major findings:
- The study highlights eight different potential systemic risk information approaches which a regulator could use in to monitor and understand potential systemic risks.
- There is not a single ideal approach, and the various approaches may work best in concert, complementing their different strengths and weaknesses. Some are better at understanding certain drivers of systemic risks, while others are easier to aggregate across firms and products.
- The information approaches vary considerably in their structure and the granularity of information which is provided to the regulator. Some take a top down approach, while others are bottoms up. There were varied opinions as to which would be the most effective. They also vary in the resources necessary, including personnel and technology to provide and analyze data that a regulator would require.
- Where possible, systemic risk regulation can be more effective by drawing on resources which already exist in the system, either in current regulatory filings or in firms’ own risk and information systems and leveraging infrastructure and repositories of data.
- Significant concerns were expressed that a focus on granular position level data may cause the systemic risk regulator to be looking at the wrong “altitude” of information, which may hinder the ability of the systemic risk regulator to focus on the relevant build-up of systemic risks.
- Reporting structures should reflect the difference between normal times when periodic reporting can provide information about latent problems, and periods of market stress when frequent reporting is valuable in understanding an unfolding shock.
- Systemic risk regulation should recognize the importance of capturing information on macroprudential risks which threaten the stability of the system as a whole; current regulation has a microprudential focus looking mainly at the stability of individual firms.
The study also looks at current reporting metrics and compares what is currently reported with the data firms and regulators thought would be needed to better understand and monitor systemic risks, thus identifying key gaps in current reporting systems. Current reporting metrics focus on the soundness of individual firms and do not effectively capture all of the drivers of broader sources of risk, but they do capture parts of the information needed to monitor systemic risk.
The study reports that systemic risk builds up over time, influenced by drivers which are distinct from factors which create risk in individual firms. Interview subjects discussed the drivers of systemic risk, as understanding these drivers is critical to designing ways to track and monitor risk. Major drivers which were identified include: firm size, interconnectedness, liquidity, concentration, correlation, tight coupling, herding behavior, crowded trades, and leverage.
The full study is available on SIFMA’s website at http://www.sifma.org/regulatory/pdf/SIFMA_Systemic_Risk_Information_Study_June_2010.pdf