SYSTEMIC RISK and RESILIENCE

FINANCIAL SECTOR AND FINANCIAL MARKETS

Systemic risk is often referred to in the context of the financial sector and financial markets.

The CFA Insititue (Chartered Financial Analysts) refers to systemic risk as "the risk of a breakdown of an entire system rather than simply the failure of individual parts." 

 

The CFA Institute sponsors the Systemic Risk Council (SRC) which is a is a private sector, non-partisan body of former government officials and financial and legal experts committed to addressing regulatory and structural issues relating to global systemic risk, with a particular focus on the United States and Europe. 

The Corporate Finance Institute (CFI) defines Systemic Risk as "the risk associated with the collapse or failure of a company, industry, or an entire economy."   

INTERNAL SYSTEMIC RISKS APPLICABLE TO ENTITIES & INDUSTRIES

At RISK TRANSPARENCY, we believe similar principles and concepts of financial sector and financial market systemic risk can be applied to any type of entity or industry

 

Just as financial institutions and markets are interconnected to other institutions and the economy, each single entity has multiple internal cross-functional areas and risk sub-categories that are interconnected to each other and to the entity's culture and strategy.  Examples of areas pervasive within an entity that provide systemic capabilities for an entity's success and longer-term resilience or failure include:

  • Culture

  • Strategy

  • Financial Targets and Pressure

Lessons learned and monitoring systems developed from financial system and financial market major failures and crisis can be leveraged to strengthen risk management at all types of entities.

 

EXAMPLE OF SYSTEMIC RISK MONITORING

 

U.S. DEPARTMENT OF TREASURY

 

FINANCIAL STABILITY OVERSIGHT COUNCIL

As established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Financial Stability Oversight Council (FSOC) provides, for the first time, comprehensive monitoring of the stability of the United States' financial system.

The Council is charged with identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States' financial system. 

OFFICE OF FINANCIAL RESEARCH

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Office of Financial Research (OFR) to support the Financial Stability Oversight Council, the Council’s member organizations, and the public.

The OFR helps to promote financial stability by looking across the financial system to measure and analyze risks, perform essential research, and collect and standardize financial data. 

 

The OFR shines a light in the dark corners of the financial system to see where risks are going, assesses how much of a threat they might pose, and provides policymakers with financial analysis, information, and evaluation of policy tools to mitigate them.  Click to see and learn more about the daily OFR Financial Stress Index and the OFR Financial System Vulnerabilities Monitor heat map.

FSOC member agency Dodd-Frank Act activities are linked below:

SYSTEMIC RISK MONITORING TOOLS

OFFICE OF FINANCIAL RESEARCH

Daily Financial Stress Index

The OFR Financial Stress Index (OFR FSI) is a daily market-based snapshot of stress in global financial markets. It is constructed from 33 financial market variables, such as yield spreads, valuation measures, and interest rates. The OFR FSI is positive when stress levels are above average, and negative when stress levels are below average.

The OFR FSI incorporates five categories of indicators: credit, equity valuation, funding, safe assets and volatility. The FSI shows stress contributions by three regions: United States, other advanced economies, and emerging markets.

 

Financial System Vulnerabilities Monitor

The OFR Financial System Vulnerabilities Monitor is a starting point for monitoring U.S. financial stability.  It is a heat map of 58 indicators of potential vulnerabilities in the U.S. financial system, organized in six categories: macroeconomic, market, credit, solvency and leverage, funding and liquidity, and contagion.

The monitor is designed to provide early warning signals of potential U.S. financial system vulnerabilities that merit investigation. It does not provide conclusions about financial stability. The OFR provides such conclusions in its Financial Stability Report and Annual Report.