Managing Systemic Risks

  • October 06, 2009

Managing Systemic Risks begins with a working definition of systemic risk as "a systemic risk is a risk that an event will trigger a loss of confidence in a substantial portion of the financial system that is serious enough to have adverse consequences for the real economy." It focuses on an operational definition of systemic risk management as a combination of six specific things that governments can do:  

  • Resilience and robustness: reduce the chances of a mishap by making the system more resilient and robust;
  • Monitoring: put in place an early warning mechanism to detect when exposure to systemic risk is increasing; 
  • Response: develop a set of policy instruments to help nudge the financial system back on course when risks are rising; 
  • SSI oversight: regulate and supervise the safety and soundness of systemically significant institutions (SSIs) - that is, those institutions and markets whose failure would threaten the stability of the system as a whole; 
  • Failing institutions: manage the failures of SSIs in an undisruptive way; and 
  • Crisis management: contain any systemic collapse of confidence, institutions or activity and shepherd the system back to health.

The paper explores what exactly each of these possible elements of systemic risk management might involve.

Pew is no longer active in this line of work, but for more information, visit the main Pew Financial Reform page.