Still Too Risky-Globe Finance/Systemic Risk

Independent Films

The IMF has released a post financial crisis study which suggests that systemic risk is still too high particularly as it relates to banks-financial institutions leaving the globe expose to a "house of cards" potential collapse possibility.

The International Monetary Fund has published a new study that finds that the risk of banks’ lending drying up following a crisis is still very real. The study’s author, Jeanne Gobat, says that Basel III accords do not go far enough.

“More needs to be done to mitigate systemic liquidity risks that can arise as a result of funding markets shutting down and institutions not being able to fund themselves. The Basel Committee's liquidity standards should help banks improve liquidity risk management at an individual level. The rules, however, by their nature do not address liquidity risk concerns that can arise out of the interconnectedness of financial institutions across markets,” Gobat says.

The study finds that one key element in diminishing the danger of liquidity drying up following a crisis is better regulation.

“Regulators need to develop an instrument that can capture an institution's contribution to systemic liquidity risk. This would allow for more effective private and public burden sharing of systemic liquidity risk. We do not take a stand on whether it should be an insurance premium, a surcharge or fee. Further analytical work would be necessary to determine method would be most effective. What we do in the report is we propose three separate methods that measure systemic liquidity risk and an institution's contribution to this risk,” Gobat said.

The report also recommends better transparency on the part of banks so that regulators know where the risk lies.

“It is essential to improve data disclosure practices to allow for better assessment of liquidity risk. For instance, providing more information on banks' liability structure including contingent liabilities would allow investors to better assess the robustness of institutions' liquidity risk-management practices. In addition, more information on the use of funding markets by institutions as well as their liquidity buffers would help supervisors better assess the probability of liquidity strains building up within an institution and within the financial system. Hence, more information on liquidity risk would also likely reduce the use of central bank money during times of crisis.”

Tags

• IMF
• Systemic Risk
• banks

Directors:

• Muhamed Sacirbey - IMF

Producers:

• Susan Sacirbey