Banks, Systemic Risk, Measurement and Mitigation

BAFFI CAREFIN Bocconi University, Faculty of Economics Sapienza University, Review of Financial Studies


Conference on “Banks, Systemic Risk, Measurement and Mitigation”

Panel address by Valeria Sannucci, Deputy Governor of the Bank of Italy

Rome, Faculty of Economics Sapienza University, 17 March 2017

Il testo:    BdI sannucci-17032017

One of the question posed and to which the speaker gives Bank of Italy position is:

«But is capital alone enough?»

A second point refers to governance: « the history of banking crises has confirmed the key role of corporate governance ». Therefore an answer to this question: «So what has been done to address corporate governance issues? » is given.

And then a look to the future: «The challenges ahead».

«Macroprudential policy has the potential to prevent financial crises so long as regulators succeed in meeting the important challenges that lie ahead. The most difficult challenge is that of identifying all the pressure points and of coming up with the most appropriate tool (or combination of tools) to tackle every aspect of systemic risk. For example, incentive distortions have traditionally been identified as the first area in need of regulatory intervention, but at the same time the responses of expectations and behaviour to policy actions is a topic about which quantitative approaches have so far offered little guidance.

This leads us to the second challenge policymakers face, namely the need to improve data quality. Currently data collection exercises and systemic risk measurement methodologies are consistent with the two-step approach proposed by the literature. In step one financial institutions report their exposures to regulators according to a set of standardized risk factors; in step two regulators use the reports to assess the endogenous risks posed by each institution, as proxied by its contribution to overall systemic risk. The data collection stage is crucial for systemic risk measurement and improving it would help policymakers to identify areas where interventions are needed.

There is no doubt that data collection is also costly. This is true in part because firms are typically reluctant to share private information as this could undermine profit opportunities and engender confidentiality and legal issues. But favouring the wider sharing of firm-level balance sheet data is desirable to price and manage systemic risk more effectively, strengthen market discipline, and improve macroprudential policy actions.

Another important challenge lies in interaction with other policies. Efforts should be made to distinguish between microprudential and macroprudential policies, to enhance coordination and to reduce overlaps. When conflicting objectives arise, financial stability should be given priority. Side effects from monetary policy to macroprudential targets, and vice versa, need to be tackled too. Changes in the monetary stance can affect banks’ risktaking behaviour, while macroprudential policies can smooth the feedback between the financial and real cycles. Looking ahead, as greater productivity becomes possible through digitalization and as traditional banks face new non-bank competitors, regulation should be equipped to address the risks posed by technological innovation and the increasing number of financial technology firms (FinTechs). The main contribution expected from regulators in this field is the adjustment and updating of the regulatory perimeter so that the same regulatory and supervisory approach and constraints are applied to the same financial activity, irrespective of the entity which undertakes that activity, so as to ensure a level playing field and to preserve financial stability. Let me conclude by stressing the importance of cooperation for macroprudential policy. A clear lesson from the 2007-09 financial crisis is that in a financially integrated world local shocks can easily turn global, which is what makes an internationally coordinated approach to address systemic risk so important. The Financial Stability Board has played a remarkable role in ensuring just such a global policy and regulatory approach to strengthening the international financial system; it is important that this role be maintained and even reinforced in the future. Streamlining the macroprudential architecture, both in terms of the authorities involved (and their respective roles), and in terms of the instruments available, can only strengthen international cooperation. In the recent European Commission’s public consultation on the review of the EU macroprudential framework, the Bank of Italy remarked that greater flexibility on the instruments should not come at the expense of the coherence of the framework or the integrity of the internal market. Major crises have historically called for close coordination between public and private players; being here today with representatives from both sides of the financial system (regulators and private players) is a clear illustration of another, but equally crucial, form of cooperation. »



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