The recent and ongoing financial crisis underscored the relevance of systemic risk in the global financial system. Because one cannot manage what one does not measure, the first step in macroprudential and systemic risk management is to develop useful measures of systemic risk. This conference brought together leading academics, practitioners, and regulators to begin the process of creating a common framework and lexicon for quantifying risk. The discussion explored measurement challenges, such as:
- What measures will be revealing?
- What are the virtues and potential pitfalls of existing measures?
- What are the most important challenges going forward?
The conference explored various components of systemic risk such as the shadow banking system, sovereign risk, and the housing sector. Another panel discussed how network analysis could be useful in identifying risks arising from high levels of interconnectedness in the financial industry.
A luncheon keynote address by Jacob Goldfield of JG Funds explored how accounting standards and lax compliance could contribute to systemic risks. In another keynote, Chris Hart of the National Transportation Safety Board discussed how many agencies and organizations came together with a common interest and collaborated effectively to improve airline safety. He suggested this could be a useful model for addressing the multi-faceted problem of managing global financial risks.
The final panels of the event focused on specifics of risk assessment and implementation. A panel presented current research on risk analytics, but also examined these tools from the perspectives of hedge funds and rating agencies. The implementation panel touched on issues of confidentiality and standardization, calling for data that could be shared across borders without breaching privacy concerns.
Each panelist gave brief remarks on some aspect of systemic risk measurement, then moderators opened the discussion to questions, comments, and debate among panelists and the audience. Over the two days, some common themes emerged:
- It's difficult to agree upon a definition of systemic risk, let alone measure it.
- Vast quantities of data can be assembled to monitor risk; the key challenge is determining what data is relevant and building useful models and methods to extract useful knowledge.
- Collaboration between the new Office of Financial Research, regulators, and researchers will help address this data challenge.
The first day of the conference concluded with a dinner hosted at the Chicago Mercantile Exchange. CME Group Chairman Emeritus Leo Melamed delivered keynote remarks, followed by a tour of the Globex operations facilities, which closely monitors financial market movements around the clock.
- Milton Friedman Institute for Research in Economics
- Federal Reserve Bank of Chicago
- Federal Reserve Bank of New York
The MFI gratefully acknowledges additional financial support from the CME Group Foundation. Andrew Lo served as a consultant to the Federal Reserve Bank of Chicago to organize this conference.