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RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

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Page 1: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

RAY SPUDECK, CHIEF ECONOMISTFLORIDA OFFICE OF INSURANCE

REGULATIONDECEMBER 3, 2009

Systemic Risk: Initiatives and Issues

Page 2: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

Systemic Risk: What is it?

The risk inherent to the entire market or entire market segment. www.investopedia.com

 

Risk that affects an entire financial market or system, and not just specific participants. www.investorwords.com 

From the FSB, IMF, and BIS: in practice G-20 members consider an institution, market or instrument as systemic if its failure or malfunction causes widespread distress, either as a direct impact or as a trigger for broader contagion. The interpretation, however, is nuanced in that some authorities focus on the impact on the financial system, while others consider the ultimate impact on the real economy as key. http://www.financialstabilityboard.org/publications/r_091107c.pdf   

Page 3: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

International Financial Supervisory Activities

In April 2009, the G20 asked the IMF, the BIS and the FSB to develop guidance for national authorities to assess the systemic importance of financial institutions, markets and instruments.

The first report, “Initial Considerations” was published in October 2009

Page 4: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

Initial Considerations Report

Developed the definition used in the first slide

Identified three characteristics to assess systemic importance:

Size Substitutability Interconnectedness

Future Work to develop high level guidelines

Other bodies are creating their own work products as well

Page 5: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

IAIS Activity

Financial Stability Committee Provided Feedback to FSB,BIS,IMF document adding

an additional consideration – development timeframe

Subcommittees and Workstreams to be identified on: Macroprudential Tools Macroprudential Surveillance Systemically important financial institutions

Page 6: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

The IAIS “Systemic” Work

Workstream A – Development of Macroprudential Tools for National Authorities

Purpose: Financial sector authorities should have suitable macroprudential tools to address systemic vulnerabilities. Measures that are simple to understand and to implement would be preferable to more complex ones, and tools that rely on pre-specified limits or rules are attractive. However, rules need to be complemented with the informed judgment of financial sector authorities based on their joint assessment of the risks across the financial system.

 Workstream B – Development of Macroprudential Surveillance Purpose: The IAIS will enhance analysis of insurance markets and explore the

possibility of conducting macroprudential surveillance. The Financial Stability Committee will develop concrete proposals by the end of 2009 and report to the Executive Committee (as per wording in the Financial Stability Framework approved by Exco in Rio)

 Workstream C - Systemically Important Financial Institutions (SIFIs) and The

“Too Big To Fail” (TBTF) ProblemsPurpose: The G20 has called on the FSB to propose by the end of October 2010

possible measures to address the “too big to fail” (TBTF) problems associated with systemically important financial institutions (SIFIs). The FSC will work in conjunction with the FSB to ensure that issues relevant to the insurance sector are taken into account and will encourage other IAIS working parties to consider related issues in their work programs.

Page 7: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

My Thoughts

Is the insurance sector a natural generator of systemic risk episodes? I am skeptical.

Financial Guarantee Insurance

Is insurance one of the largest natural transmission pathways? I am a believer

We need to be part of the discussion to avoid the unintended consequences of bad policy; our seat at the table is imperative

Page 8: RAY SPUDECK, CHIEF ECONOMIST FLORIDA OFFICE OF INSURANCE REGULATION DECEMBER 3, 2009 Systemic Risk: Initiatives and Issues

THANK YOU

The Work is Just Beginning